The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling
Posted: 19 Nov 2003
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The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling
The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling
Abstract
We argue that repeated interaction and high-powered formal contracts can be either substitutes or complements, depending on the relative impact of repeated interaction on incentive problems and contracting costs. In the offshore drilling industry, we find that oil and gas companies are less likely to choose fixed-price contracts as the frequency of their interaction with a driller increases. This supports the conclusion that repeated interaction and high-powered formal contracts are substitutes in this setting, indicating that repeated interaction reduces incentive problems more than contracting costs. In addition, we find that using instrumental variables to account for the endogenous matching of drillers to projects strengthens our results.
Keywords: contracts, repeated interaction, relationships, transaction costs, incentives
JEL Classification: L14, L22, L71
Suggested Citation: Suggested Citation