Long-Term Contracts and Short-Term Commitment: Price Determination for Heterogeneous Freight Transactions

Abstract

This paper considers a class of contracts in which parties write detailed, long-term performance obligations that leave one or both parties with broad discretion to terminate the agreement on short notice with little or no penalty. I argue that formal contracts may be valuable, even where trade involves little or no relationship-specific investment and termination is the only remedy, as a way of economizing on the cost of determining prices for a series of heterogeneous transactions. Evidence from a survey of truck drivers shows both the general structure of contracts between freight carriers and drivers and the manner in which hauls are priced to be consistent with the goal of economizing on renegotiation costs.