We investigate whether formal contracts can help in resolving the holdup problem by studying repeated transactions between a seller and a buyer. Contrary to previous findings, we demonstrate that a simple fixed-price contract based on product delivery is of value even when relation-specific investment is purely cooperative. Furthermore, we show that focusing our attention on fixed-price contracts as a form of formal contracts is without loss of generality. The key driving force is a possibility that the relation-specific investment decreases the surplus under no trade. This possibility, although very plausible, has been largely ignored in previous analyses of the holdup problem (JEL C78, D23, D86)
Itoh, Hideshi, and Hodaka Morita.
"Formal Contracts, Relational Contracts, and the Threat-Point Effect."
American Economic Journal: Microeconomics,
Bargaining Theory; Matching Theory
Organizational Behavior; Transaction Costs; Property Rights
Economics of Contract: Theory