The Role of Market Forces in Assuring Contractual Performance

@article{Klein1981TheRO,
  title={The Role of Market Forces in Assuring Contractual Performance},
  author={Benjamin Klein and Keith B. Leffler},
  journal={Journal of Political Economy},
  year={1981},
  volume={89},
  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
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