Indefinite Contracting: Evidence from Subcontracting Agreements

Abstract: This paper examines factors explaining the choice of an indefinite duration for inter-firm contracts from the transaction cost perspective using a sample of subcontracting agreements in the Spanish electronics industry. We particularly consider the impact of the classical transactional attributes, such as specificity and uncertainty, along with other governance mechanisms, such as contractual completeness and relational governance, on duration clauses. The results show that the probability of signing an indefinite-duration contract is related positively to the specificity of the activity and negatively to the degree of completeness of the contract and the uncertainty regarding future demand. Contrary to some classical arguments, these findings suggest that an explicitly long-term contract is not always needed to protect against contractual hazards. Indefinite-duration contracts may also provide protection while improving the flexibility to adjust the relationship to the changing environment.