The optimal duration of a supply contract balances the costs of re-selecting 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 trade-off 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.
"Contract Duration and the Costs of Market Transactions."
American Economic Journal: Microeconomics
14 (3): 164-212
Firm Behavior: Empirical Analysis
Organizational Behavior; Transaction Costs; Property Rights
Economics of Contract: Theory
National Government Expenditures and Related Policies: Procurement
Transactional Relationships; Contracts and Reputation; Networks