Contracting on Time

25 Pages Posted: 2 Jan 2004

See all articles by Sergei M. Guriev

Sergei M. Guriev

Sciences Po; Centre for Economic Policy Research (CEPR); European Bank for Reconstruction and Development (EBRD)

Dmitriy Kvasov

University of Adelaide - School of Economics

Date Written: November 2003

Abstract

The paper shows how the time considerations - especially concerning contract duration - affect incomplete contract theory. We consider a bilateral trade setting where contracting, investment, trade, and renegotiation take place in continuous time. Time is not only a dimension along which the relationship unfolds but also a continuous verifiable variable that can be included in contracts. We show that incentives for efficient investment can be provided either through a chain of constantly renegotiated fixed-term contracts; or through a renegotiation-proof 'evergreen' contract - a contract of indefinite duration that includes an option of unilateral termination with advance notice. We provide a detailed analysis of properties of optimal contracts.

Keywords: incomplete contracts, renegotiation, optimal duration, evergreen contracts

JEL Classification: D23, K12, L14

Suggested Citation

Guriev, Sergei M. and Kvasov, Dmitriy, Contracting on Time (November 2003). Available at SSRN: https://ssrn.com/abstract=469180 or http://dx.doi.org/10.2139/ssrn.469180

Sergei M. Guriev (Contact Author)

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

HOME PAGE: http://econ.sciences-po.fr/staff/sergei-guriev

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2EH
United Kingdom

Dmitriy Kvasov

University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia

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