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  3. American Economic Review
  4. December 2005
  5. Contracting on Time

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Contracting on Time

  • Sergei Guriev
  • Dmitriy Kvasov
American Economic Review
vol. 95, no. 5, December 2005
(pp. 1369–1385)
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Abstract

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

Citation

Guriev, Sergei, and Dmitriy Kvasov. 2005. "Contracting on Time." American Economic Review, 95 (5): 1369–1385. DOI: 10.1257/000282805775014452

JEL Classification

  • D86 Economics of Contract: Theory