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Long-term Relationships Governed by Short-term Contracts

Author

Listed:
  • Crawford, Vincent P
Abstract
This paper studies the effects of contract duration on the incentive to invest in a relationship when its parties are rational and have perfect information, and contracts are complete, ex cept that short-term contracts specify only current-period actions. T hen, short-term contracting distorts investment decisions only when t he efficient plan involves mainly sunk-cost investment and the relati onship plays a consumption-smoothing role. There is a general, but no t universal, tendency to underinvest. Copyright 1988 by American Economic Association.

Suggested Citation

  • Crawford, Vincent P, 1988. "Long-term Relationships Governed by Short-term Contracts," American Economic Review, American Economic Association, vol. 78(3), pages 485-499, June.
    • Handle: RePEc:aea:aecrev:v:78:y:1988:i:3:p:485-99
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    JEL classification:

    • D29 - Microeconomics - - Production and Organizations - - - Other
    • D3 - Microeconomics - - Distribution

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