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Opportunism and the Dynamics of Incomplete Contracts

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  • Bac, Mehmet

Abstract

This paper studies a buyer-seller relationship where "quality" is not contractible but is affected by effort and the seller's privately known innate value. The seller's cost of effort is also private knowledge. Assuming constant outside opportunities, we show that more than two contracts is redundant, the sequence of contracts exhibits increasing prices and durations, and commitments for prices beyond the actual contract invite opportunism, not effort. The seller uses effort during the screening process, which improves noncontractible quality. As a result, type-related information may have negative value when contracts are incomplete. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Bac, Mehmet, 1993. "Opportunism and the Dynamics of Incomplete Contracts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 663-683, August.
    • Handle: RePEc:ier:iecrev:v:34:y:1993:i:3:p:663-83
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    Cited by:

    1. Chris Shugart, 1998. "Regulation-by-Contract and Municipal Services: The Problem of Contractual Incompleteness," Development Discussion Papers 1998-09, JDI Executive Programs.
    2. Mehmet Bac, 2009. "An economic rationale for firing whistleblowers," European Journal of Law and Economics, Springer, vol. 27(3), pages 233-256, June.
    3. Bac, Mehmet, 2001. "To invest or screen efficiently: a potential conflict in relationships governed by incomplete contracts," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 567-588, March.
    4. Bac, Mehmet, 2000. "On-the-Job Specific Training and Efficient Screening," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 681-701, October.

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