New contract design boosts efficiency and risk-sharing in buyer-seller relationships
The article discusses how to design contracts for buyer-seller relationships when investments and outcomes are not easily verifiable. The researchers found that efficient investments and optimal risk-sharing can be achieved if the initial contract can monitor renegotiation. They focused on default options if renegotiation fails and the allocation of bargaining power. These features can be included in contracts using clauses like specific-performance and penalties for delays.