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  3. American Economic Journal: Microeconomics
  4. August 2015
  5. Formal Contracts, Relational Contracts, and the Threat-Point Effect

Formal Contracts, Relational Contracts, and the Threat-Point Effect

  • Hideshi Itoh
  • Hodaka Morita
American Economic Journal: Microeconomics
vol. 7, no. 3, August 2015
(pp. 318-46)
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Abstract

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)

Citation

Itoh, Hideshi, and Hodaka Morita. 2015. "Formal Contracts, Relational Contracts, and the Threat-Point Effect." American Economic Journal: Microeconomics, 7 (3): 318-46. DOI: 10.1257/mic.20130111

Additional Materials

JEL Classification

  • C78 Bargaining Theory; Matching Theory
  • D23 Organizational Behavior; Transaction Costs; Property Rights
  • D86 Economics of Contract: Theory
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