Events

Professor Richard Faltings
Assistant Professor of Marketing
Rady School of Management
University of California, San Diego

ABSTRACT

In many markets, advance interim contracts include an explicit right to renege, granting one party the option to switch to more efficient matches that emerge later in the search process. This paper studies the formation and welfare implications of such interim contracts, leveraging novel data from a brokerage firm in the trucking industry. The broker allocates advance contracts on shipments to carriers through a dynamic auction mechanism and penalizes cancellations through a reputational mechanism. I develop a theoretical model linking the carrier’s bidding problem to the firm’s cancellation penalties through a dynamic job-search problem and structurally estimate the model from rich data on bids and cancellations. In counterfactual simulations, I show that the firm is incentivized to lower cancellation penalties as the option value of the right to renege is priced into carrier bids. The results rationalize the large degree of contractual flexibility observed in the trucking industry as an efficient market outcome rather than one constrained by limited contractual enforcement.