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Long Term Contracting with Private Information

37 Pages Posted: 6 Mar 2012 Last revised: 20 Apr 2012

Tracy Lewis

Duke University

Alan Schwartz

Yale Law School

Date Written: February 27, 2012

Abstract

This paper explores the possibility for efficient long term contracts among traders with changing and privately known incentives for exchange. We analyze a negotiation process that enables parties to adapt the default rules of exchange to changes in their preferences for trade. The selection of control rights and default options is delegated to the traders themselves, who collectively are best informed as to which investments and exchanges are efficient. The paper demonstrates how contracts with flexible and endogenous default options are tailored to maximize the gains from exchange. Applications of our findings for contract theory, the design of commercial contracts, and the need for legal support are discussed.

Suggested Citation

Lewis, Tracy and Schwartz, Alan, Long Term Contracting with Private Information (February 27, 2012). Yale Law & Economics Research Paper No. 446. Available at SSRN: https://ssrn.com/abstract=2016375 or http://dx.doi.org/10.2139/ssrn.2016375

Tracy Lewis (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Alan Schwartz

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4030 (Phone)
203-432-8260 (Fax)

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