Associate Professor of Strategy
JOURNAL ARTICLE | Journal of Law, Economics and Organizations | 20 | January 2004
The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling
The authors argue that repeated interaction and high-powered formal contracts can be either substitutes or complements, depending on the relative impact of repeated interaction on incentive problems and contracting costs.In the offshore drilling industry, they find that oil and gas companies are less likely to choose fixed-price contracts as the frequency of their interaction with a driller increases. This supports the conclusion that repeated interaction and high-powered formal contracts are substitutes in this setting, indicating that repeated interaction reduces incentive problems more than contracting costs.In addition, they find that using instrumental variables to account for the endogenous matching of drillers to projects strengthens their results.