Termination Damages and Relational Contracts

We study the economic impact of proposed legislation requiring processors to pay termination damages to growers when contractual relationships are prematurely severed. In doing so, we derive the optimal relational contract in the presence of asset specificity, ex post market power on the part of processors, and the presence of an exogenous shock that might destroy gains from trade from contracting. The optimal contract then provides a credible framework for assessing how government intervention might affect optimizing behavior of contracting parties. We conclude that termination damages would not be distortionary and would not undermine processors' ability to design effective relational incentives. However, the distribution of surplus would be affected.


Issue Date:
2005
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/19184
Total Pages:
47
Series Statement:
Selected Paper 136498




 Record created 2017-04-01, last modified 2017-08-24

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