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Publications
  • August 2022
  • Article
  • American Economic Journal: Microeconomics

Contract Duration and the Costs of Market Transactions

By: Alexander J. MacKay
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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

Supply Contracts; Intermediate Goods; Switching Costs; Vertical Relationships; Transaction Costs; Contract Duration; Identification; Supply Chain; Cost; Contracts; Auctions; Mathematical Methods

Citation

MacKay, Alexander J. "Contract Duration and the Costs of Market Transactions." American Economic Journal: Microeconomics 14, no. 3 (August 2022): 164–212.
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About The Author

Alexander J. MacKay

Strategy
→More Publications

More from the Author

    • 2022
    • Faculty Research

    Dynamic Pricing and Demand Volatility: Evidence from Restaurant Food Delivery

    By: Alexander J. MacKay, Dennis Svartbäck and Anders G. Ekholm
    • July 7, 2022
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    Are Online Prices Higher Because of Pricing Algorithms?

    By: Zach Y. Brown and Alexander J. MacKay
    • 2021
    • Faculty Research

    Dynamic Pricing Algorithms, Consumer Harm, and Regulatory Response

    By: Alexander J. MacKay and Samuel Weinstein
More from the Author
  • Dynamic Pricing and Demand Volatility: Evidence from Restaurant Food Delivery By: Alexander J. MacKay, Dennis Svartbäck and Anders G. Ekholm
  • Are Online Prices Higher Because of Pricing Algorithms? By: Zach Y. Brown and Alexander J. MacKay
  • Dynamic Pricing Algorithms, Consumer Harm, and Regulatory Response By: Alexander J. MacKay and Samuel Weinstein
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