Contracting between Firms: Empirical Evidence

50 Pages Posted: 21 Jun 2016 Last revised: 29 Jul 2016

See all articles by Rajkamal Iyer

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Date Written: July 28, 2016

Abstract

We analyze contracts between a large buyer and her suppliers. We find that contracts with critical product suppliers contain more clauses that address moral hazard, primarily through monitoring. If holdup concerns are larger, there are more contractual protections against it. Over time, contracts with the same supplier include additional provisions that address moral hazard through monitoring. This dynamic effect is strongest for service contracts, where observability and verifiability are initially lower. Our findings indicate that contracts become more complete over time and provide support to incomplete-contracting models that argue that contracts become more complete as contracting costs decrease.

Keywords: agency problems, holdup problems, incomplete contracting, contract theory

JEL Classification: D86, K12, L24

Suggested Citation

Iyer, Rajkamal and Sautner, Zacharias, Contracting between Firms: Empirical Evidence (July 28, 2016). Review of Economics and Statistics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2798102 or http://dx.doi.org/10.2139/ssrn.2798102

Rajkamal Iyer

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management ( email )

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Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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Belgium

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