Contract Duration in Subcontracting Agreements: Evidence from the Electronics Industry

Abstract

This paper examines factors explaining the duration of inter-firm contracts from the transaction costs perspective, using a sample of subcontracting agreements in the Spanish electronics industry. We particularly consider the influence of transactional attributes, such as specificity and uncertainty, along with other safeguards, in duration clauses. Results show that the probability of signing an indefinite duration contract is related positively to the specificity of the activity and negatively to the uncertainty regarding future demand and to the degree of formalization of the contract. Contrary to some classical arguments, these findings suggest that an explicitly long-term contract is not always needed to protect against contractual hazards. Indefinite duration contracts, working as relational contracting, also provide protection and, additionally, improve flexibility for adjusting the relationship to the changing environment.

Keywords: Subcontracting, indefinite duration, transaction costs analysis, contract design, electronics industry

JEL Classification: L14, L22, L23