Opportunism and the dynamics of the incomplete contracts

Date

1993

Authors

Bac, M.

Editor(s)

Advisor

Supervisor

Co-Advisor

Co-Supervisor

Instructor

Source Title

International Economic Review

Print ISSN

0020-6598

Electronic ISSN

Publisher

Wiley-Blackwell Publishing, Inc.

Volume

34

Issue

3

Pages

663 - 683

Language

English

Journal Title

Journal ISSN

Volume Title

Series

Abstract

This paper studies a buyer-seller relationship where "quality" is not contractible but is affected by effort and the seller's privately known innate value. The seller's cost of effort is also private knowledge. Assuming constant outside opportunities, we show that more than two contracts is redundant, the sequence of contracts exhibits increasing prices and durations, and commit- ments for prices beyond the actual contract invite opportunism, not effort. The seller uses effort during the screening process, which improves noncontract- ible quality. As a result, type-related information may have negative value when contracts are incomplete.

Course

Other identifiers

Book Title

Keywords

Citation