American Economic Review: Vol. 95 No. 5 (December 2005)
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Contracting on Time
Guriev, Sergei, and Dmitriy Kvasov. 2005. "Contracting on Time." American Economic Review, 95(5): 1369-1385.
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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