Affiliation:
1. Harvard University, Harvard Business School (email: )
Abstract
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. (JEL D22, D23, D44, D86, H57, L14)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
2 articles.
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