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Termination Clauses in Long-Term Contracts (1996)

Sen, Arijit

Oxford, UK : Blackwell Publishing Ltd

Journal of economics & management strategy 5 (1996), S. 0

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ISSN: 1530-9134

Source: Blackwell Publishing Journal Backfiles 1879-2005

Topics: Economics

Notes: Many long-term contracts incorporate a termination clause. This paper argues that when agents have hidden information, such a clause has a beneficial incentive effect—it enables a principal to screen agents' private information at a lower cost. In a two-period model, this paper characterizes the optimal long-term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first-period cost is high. The analysis delineates how the optimality of this clause depends on the intertemporal cost correlation structure, on the limits to agents' liability, and on the principal's degree of commitment.

Type of Medium: Electronic Resource

URL: http://dx.doi.org/10.1111/j.1430-9134.1996.00473.x

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