Modeling the Antecedents of Incomplete Contract Choice in Bilateral Trade: An Experimental Investigation

Modeling the Antecedents of Preferences for Incomplete Contracts in Bilateral Trade: An Experimental Investigation

Behavioral Research in Accounting ◽

10.2308/bria-50346 ◽

2012 ◽

Vol 25 (1) ◽

pp. 135-159 ◽

Cited By ~ 3

Author(s):

Fabienne Miller ◽

Christine A. Denison ◽

Linda J. Matuszewski

Keyword(s):

Experimental Investigation ◽

Transaction Costs ◽

Risk Taking ◽

Bargaining Power ◽

Bilateral Trade ◽

Control Mechanism ◽

Incomplete Contracts ◽

Incomplete Contract ◽

Firm Level ◽

Economic Transaction

ABSTRACT: Contracts constitute an important control mechanism. Their design is influenced by the preferences of the contracting parties, in addition to firm-level economic transaction costs. This study conducts an experiment to explore the antecedents of preferences for a less complete contract in a trade setting. Results from an experiment indicate that the preference for a more complete versus a less complete contract depends on the perceived riskiness of the incomplete contract, which is influenced by the perceived bargaining power and fairness preferences (namely, distributive and procedural fairness preferences) of the contracting parties. In other words, we find evidence that suggests that choosing the completeness of a contract is a form of risk-taking, and that the preference for a more incomplete contract is influenced by perceived power and fairness preferences.

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Contracting on Time

The American Economic Review ◽

10.1257/000282805775014452 ◽

2005 ◽

Vol 95 (5) ◽

pp. 1369-1385 ◽

Cited By ~ 47

Author(s):

Sergei Guriev ◽

Dmitriy Kvasov

Keyword(s):

Detailed Analysis ◽

Continuous Time ◽

Contract Theory ◽

Bilateral Trade ◽

Incomplete Contract ◽

Optimal Contracts ◽

Contract Duration ◽

Unilateral Termination ◽

Advance Notice ◽

The Relationship

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.

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