Contracting between Firms: Empirical Evidence
50 Pages Posted: 21 Jun 2016 Last revised: 29 Jul 2016
Date Written: July 28, 2016
We analyze contracts between a large buyer and her suppliers. We find that contracts with critical product suppliers contain more clauses that address moral hazard, primarily through monitoring. If holdup concerns are larger, there are more contractual protections against it. Over time, contracts with the same supplier include additional provisions that address moral hazard through monitoring. This dynamic effect is strongest for service contracts, where observability and verifiability are initially lower. Our findings indicate that contracts become more complete over time and provide support to incomplete-contracting models that argue that contracts become more complete as contracting costs decrease.
Keywords: agency problems, holdup problems, incomplete contracting, contract theory
JEL Classification: D86, K12, L24
Suggested Citation: Suggested Citation