Contracting between firms: empirical evidence

We analyse 185 contracts signed between a buyer and 89 suppliers to test how moral-hazard and hold-up problems affect contract design. Our data allow us to study both static and dynamic effects. If a supplier’s products are more critical to the buyer, contracts contain more clauses that address moral-hazard. If hold-up concerns are larger, both the buyer and the suppliers seek for more contractual protection against it. Over time, contracts signed with the same supplier include more provisions that address moral hazard through monitoring. This dynamic effect is strongest for service contracts, where observability and verifiability are initially lower. Our data allow us to address the endogeneity of product characteristics, and we are able to control for pricing effects and bargaining power.