American Law and Economics Review Advance Access originally published online on June 27, 2009
American Law and Economics Review 2009 11(1):79-111; doi:10.1093/aler/ahp005
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Long-Term Contracts and Short-Term Commitment: Price Determination for Heterogeneous Freight Transactions
University of Michigan
Send Correspondence to: Scott E. Masten, Stephen M. Ross School of Business, University of Michigan, 701 Tappan St., Ann Arbor, MI 48109-1234, USA; Tel.: (734) 764-1389; Fax: (815) 572-8207; E-mail: semasten{at}umich.edu
JEL Classification: D86, L14, L91
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Abstract |
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This paper considers a class of contracts in which parties write detailed, long-term performance obligations that leave one or both parties with broad discretion to terminate the agreement on short notice with little or no penalty. I argue that formal contracts may be valuable, even where trade involves little or no relationship-specific investment and termination is the only remedy, as a way of economizing on the cost of determining prices for a series of heterogeneous transactions. Evidence from a survey of truck drivers shows both the general structure of contracts between freight carriers and drivers and the manner in which hauls are priced to be consistent with the goal of economizing on renegotiation costs.
Portions of this paper were previously circulated in Lafontaine and Masten (2002). I wish to thank Kenneth Boyer, Joseph Mahoney, and participants at seminars at the University of Illinois at Urbana-Champaign and the Tilburg University Law and Economics Center for valuable comments. The analysis and results, as well as any errors therein, are the responsibility of the author. Financial support from the Sloan Foundation through the University of Michigan Trucking Industry Program (UMTIP) is gratefully acknowledged.