The Role of Market Forces in Assuring Contractual Performance

  title={The Role of Market Forces in Assuring Contractual Performance},
  author={Benjamin Klein and Keith B. Leffler},
  journal={Journal of Political Economy},
  pages={615 - 641}
The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined. Increased price is shown to be a means of assuring contractual performance. A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a… Expand
The Determinants of Price and Quality in Competitively Tendered Contracts
Traditional analysis of the impact of competitive tendering on service provision has focused on costs and prices. Critics have argued that price reductions lead to lower quality. We tested thisExpand
Guaranteed pricing in industrial purchases: Making use of markets in contractual relations
Abstract Two types of price guarantees are considered: (1) meeting competition clauses, where firms meet the lowest price offered by rivals; and (2) most favored customer clauses, where firms meetExpand
Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market
Abstract In many areas of the world, a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision. We present models of markets withExpand
Explicit versus implicit contracting in the debt market: The case of leasing
Abstract We investigate the presence of implicit contract in the financial markets. The contractual relationships between the firm and their fund provider may be either implicit or explicit. InExpand
Asset Specificity, Long-Term Contracts, and the Good Faith Requirement
This paper analyzes the effect of court intervention on the choice between contracts and vertical integration when a specialized investment is required for least-cost production. It shows that: 1)Expand
The Role of Transaction-Specific Capital and Market Structure in Contracting: Evidence from Japan's Overseas Coking Coal Procurement
Coking coal procurement by Japanese steel firms takes place within a framework of long-term contracts. We specify the determinants of price in a long-term contract and use an econometric model toExpand
Reputation, Product Quality, and Warranties
This paper studies the firm's choice between implicit and explicit contracts as alternative methods of assuring product quality. The relationship between these two contractual forms is studied usingExpand
Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market
In many areas of the world, a significant part of the cost of obtaining a good or service is the cost of enforcing the contracts entailed in its provision. We present models of markets withExpand
Exercising Market Power in Proprietary Aftermarkets
Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products andExpand
Screening and signalling models have both been used to analyze the price-quality relationship. Both types of model have their shortcomings. An alternative approach is presented which involvesExpand


Vertical Integration, Appropriable Rents, and the Competitive Contracting Process
The potential of post-contractural apportunistic behavior for improving market efficiency through intrafirm rather than interfirm transactions is examined under the assumption that vertical costsExpand
Transaction-Cost Economics: The Governance of Contractual Relations
THE new institutional economics is preoccupied with the origins, incidence, and ramifications of transaction costs. Indeed, if transaction costs are negligible, the organization of economic activityExpand
The Competitive Supply of Money
FEW AREAS OF ECONOMIC AcTIvrrY can claim as long and unanimous a record of agreement on the appropriateness of governmental intervention as the supply of money.l Very early in our history money wasExpand
Free Competition and the Optimal Amount of Fraud
THIS paper explores the reasons for and determinants of the provision by a firm of false information to a consumer so as to induce purchases which would not be made if the consumer possessed fullExpand
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism
This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets. On the one hand, the interaction of qualityExpand
Non-contractual relations in business: a preliminary study
Most larger companies, and many smaller ones, attempt to plan carefully and completely. Important transactions not in the ordinary course of business are handled by a detailed contract. For example,Expand
A Model of Advertising and Product Quality
This essay presents a model of a single market in which goods of different qualities are sold and sellers advertise. Sellers advertise noncooperatively, knowing rivals' outlays and buyers' behaviorExpand
Information and Consumer Behavior
  • P. Nelson
  • Economics
  • Journal of Political Economy
  • 1970
Consumers are continually making choices among products, the consequences of which they are but dimly aware. Not only do consumers lack full information about the prices of goods, but theirExpand
Law Enforcement, Malfeasance, and Compensation of Enforcers
THE new economic approach to political behavior seeks to develop a positive theory of legislation, in contrast to the normative approach of welfare economics. The new approach asks why certainExpand
Job Market Signaling
1. Introduction, 355. — 2. Hiring as investment under uncertainty, 356. — 3. Applicant signaling, 358. — 4. Informational feedback and the definition of equilibrium, 359. — 5. Properties ofExpand