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  • August 2022
  • Article
  • American Economic Journal: Microeconomics

Contract Duration and the Costs of Market Transactions

By: Alexander MacKay
  • Format:Print
  • | Pages:49
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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

Supply Contracts; Intermediate Goods; Switching Costs; 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." American Economic Journal: Microeconomics 14, no. 3 (August 2022): 164–212.
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About The Author

Alexander J. MacKay

Strategy
→More Publications

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More from the Author
  • Cost Plus Drugs By: Alexander MacKay and James Barnett
  • Recovering Investor Expectations from Demand for Index Funds By: Mark Egan, Alexander J. MacKay and Hanbin Yang
  • Blue Steel Investments By: Alexander J. MacKay
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