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http://ssrn.com/abstract=39743
 
 

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Contract Renewal Under Uncertainty


Torben M. Andersen


University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Morten Stampe Christensen


University of Aarhus - Department of Economics

September 1996

Working Paper No. 1997-5

Abstract:     
The incentive to call for contract renewal to adjust prices is considered from a bilateral perspective in a setting where changes in outside opportunities drive the incentive to renew contracts and costs preclude continuous renewal. A model encompassing several contract forms is formulated, and the existence of an equilibrium to the bilateral renewal game is established. Prices display inertia, and the incumbent contract is found to be more resistant to changes in outside opportunities, the larger the costs of contract renewal, the variability of outside opportunities and the lower the discount rate. The model is shown to match a number of empirical observations on contracts, and in a macroeconomic application of the model it is shown how nominal inertia may arise and why the rate of inflation and monetary uncertainty have real effects.

Number of Pages in PDF File: 34

JEL Classification: C72, D81, E31

working papers series


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Date posted: August 11, 1997  

Suggested Citation

Andersen, Torben M. and Christensen, Morten Stampe, Contract Renewal Under Uncertainty (September 1996). Working Paper No. 1997-5. Available at SSRN: http://ssrn.com/abstract=39743 or http://dx.doi.org/10.2139/ssrn.39743

Contact Information

Torben M. Andersen (Contact Author)
University of Aarhus - Department of Economics ( email )
University Park
Building 322
DK-8000 Aarhus C
Denmark
+45 8 942 1609 (Phone)
+45 8 613 6334 (Fax)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Morten Stampe Christensen
University of Aarhus - Department of Economics
University Park
DK-8000 Aarhus C
Denmark
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References:  26
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