Contract Duration and the Costs of Market Transactions
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 J. "Contract Duration and the Costs of Market Transactions." American Economic Journal: Microeconomics (forthcoming). View Details
