Publications
Publications
- 2020
- HBS Working Paper Series
Contract Duration and the Costs of Market Transactions
By: Alexander MacKay
Abstract
The optimal duration of a supply contract balances the costs of reselecting 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 tradeoff 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.
Keywords
Vertical Relationships; Transaction Costs; Contract Duration; Identification; Supply Chain; Cost; Contracts; Auctions; Mathematical Methods
Citation
MacKay, Alexander. "Contract Duration and the Costs of Market Transactions." Harvard Business School Working Paper, No. 18-058, December 2017. (Revised May 2020. Direct download.)