Long-term, Short-term and Renegotiation: On the Value of Commitment in Contracting

Spot contracting generally involves efficiency losses relative to long-term contracting. It is proved here that short-term contracting and renegotiation allow to achieve long-run efficiency when transfers are not limited, objectives are conflicting, and no relevant asymmetric information appears at recontracting dates. This last assumption excludes adverse selection, but not moral hazard when technologies and preferences are time separable. Copyright 1990 by The Econometric Society.

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