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Publications
  • 2020
  • Working Paper
  • HBS Working Paper Series

Contract Duration and the Costs of Market Transactions

By: Alexander MacKay
  • Format:Print
  • | Language:English
  • | Pages:85
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Abstract

The optimal duration of a supply contract balances the costs of reselecting 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 tradeoff 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.

Keywords

Vertical Relationships; Transaction Costs; Contract Duration; Identification; Supply Chain; Cost; Contracts; Auctions; Mathematical Methods

Citation

MacKay, Alexander. "Contract Duration and the Costs of Market Transactions." Harvard Business School Working Paper, No. 18-058, December 2017. (Revised May 2020. Direct download.)
  • SSRN
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About The Author

Alexander J. MacKay

Strategy
→More Publications

Related Work

    • August 2022
    • American Economic Journal: Microeconomics

    Contract Duration and the Costs of Market Transactions

    By: Alexander MacKay
Related Work
  • Contract Duration and the Costs of Market Transactions By: Alexander MacKay
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