Contract Duration and the Costs of Market Transactions
American Economic Journal: Microeconomics
vol. 14,
no. 3, August 2022
(pp. 164-212)
Abstract
The optimal duration of a supply contract balances the costs of re-selecting a supplier against the costs of being matched to an inefficient supplier when the contract lasts too long. I develop a structural model of contract duration that captures this trade-off and provide an empirical strategy for quantifying (unobserved) transaction costs. I estimate the model using federal supply contracts for a standardized product, where suppliers are selected by procurement auctions. The estimated transaction costs are substantially greater than consumer switching costs and a significant portion of total buyer costs. Counterfactuals illustrate the importance of accounting for the duration margin.Citation
MacKay, Alexander. 2022. "Contract Duration and the Costs of Market Transactions." American Economic Journal: Microeconomics, 14 (3): 164-212. DOI: 10.1257/mic.20200128Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D44 Auctions
- D86 Economics of Contract: Theory
- H57 National Government Expenditures and Related Policies: Procurement
- L14 Transactional Relationships; Contracts and Reputation; Networks
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