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Bilateral Relationships Governed by Incomplete Contracts

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  • Mehmet Bac

Abstract

This paper explores implications of interactions between concontractibility of quality, multidimensional hidden information, switching costs and the frequency of trade on the terms of contracts in a buyer-seller setup. Optimal contractual arrangements are showm to consist of a sequence of two contracts with nondecreasing prices and nonincreasing quality and volume of exchange. In the absence of switching costs, an increase in the frequency of trade is absorbed by the first contract. For high frequencies of trade, switching costs may enhance welfare by improving the efficiency of screening through a better allocation of time between contracts.

Suggested Citation

  • Mehmet Bac, 1997. "Bilateral Relationships Governed by Incomplete Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 153(2), pages 320-320, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(199706)153:2_320:brgbic_2.0.tx_2-t
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    Citations

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    Cited by:

    1. 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.
    2. Bac, Mehmet & Saglam, Ismail, 1999. "Managerial defections, promotion criteria and firm growth," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 917-940, October.
    3. Mehmet Bac, 2009. "An economic rationale for firing whistleblowers," European Journal of Law and Economics, Springer, vol. 27(3), pages 233-256, June.
    4. 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.

    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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