OPPORTUNISM AND THE DYNAMICS OF INCOMPLETE CONTRACTS

This paper studies a buyer-seller relationship where ''quality'' is no t contractible but is affected by effort and the seller's privately kn own innate value. The seller's cost of effort is also private knowledg e, Assuming constant outside opportunities, we show that more than two contracts is redundant, the sequence of contracts exhibits increasing prices and durations, and commitments for prices beyond the actual co ntract invite opportunism, not effort. The seller uses effort during t he screening process, which improves noncontractible quality. As a res ult. type-related information may have negative value when contracts a re incomplete.