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Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22 2 , The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94 4 , Although recognizing contractual incompleteness, this study investigates the influence of power in the selection process of contract terms. In other words, contracts present both incompleteness and failures. Contractual failures, as with market failures, enable agents to influence term selection through contract power.
The theoretical model exploits the ability of an economic agent to impose measurement costs over a commodity's attributes, grounded in the Economic Analysis of Property Rights Barzel, Barzel, Y. Following Barzel 18 Barzel, Y. If higher measurement costs unveil fewer attributes of a commodity, as imposition of measurement costs become higher, fewer attributes will be specified in the transaction.
In a contractual perspective, selection of contract terms that impose higher measurement costs leaves deliberate contractual gaps or unspecified attributes. These unspecified attributes could be consumed with no marginal payment, because no legal rights are assigned.
Thus, contract power does not minimize transaction costs, nor does it maximize net surplus of cooperation or redistribute value. The Brazilian orange juice sector illustrates power in contracts.
During s, citrus growers accused juice processors of concerted action, using contract terms in order to deliberately raise profits. Transactions of oranges between citrus growers and juice processing firms were performed using standard contracts for the whole sector from to The Administrative Council of Economic Defense CADE , the Brazilian antitrust office, accepted those accusations, showing the evidence of power exertion on these contracts.
More recently, between and , the creation of a Council for Orange Producers and Orange Juice Industries Consecitrus was negotiated between citrus growers and juice processors. The economic power of juice processors influenced Consecitrus' negotiation process, because the definition of a price formation mechanisms was debated. The CADE is playing a key role in Consecitrus' creation, because it arbitrates negotiations between citrus growers and juice processing firms.
This paper is organized in five sections including this introduction. The second section presents theoretical background based on economic analysis of property rights Barzel, Barzel, Y. Third section presents data and methods.
Section four presents evidence of contract power in the orange juice sector at two different times: between and ; and between and Finally, in section five, concluding remarks are made. The analysis of an institutional structure of production rests on the classical work of Ronald H. Coase Coase, R.
The nature of the firm. Economica, 4 16 , Moreover, in a world of positive transaction costs, the structure of property rights influences the final allocation of resources Coase, Coase, R.
The problem of social cost. Journal of Law and Economics, 3 1 , Institutions, institutional change and economic performance. Comparative economic Organization: The analysis of discrete structural alternatives.
Administrative Science Quarterly, 36 2 , The economic institutions of capitalism. New York: Free Press. This institutional structure of production Coase, Coase, R. The Institutional Structure Of Production.
American Economic Review, 82 4 , Fragile social norms: Un sustainable exploration of forest products. International Journal on Food System Dynamics, 1 1 , Barzel Barzel, Y. When faced with these two definitions, Barzel , p. The second one, according to Barzel , p. These two categories are not mutually exclusive types of rights", because according to Barzel 3 Barzel, Y.
Thus, economic rights are the end of all transactions, which can or cannot be done through legal rights means. In this perspective, a commodity is a bundle of attributes Barzel, Barzel, Y. Journal of Law and Economics, 25 1 , These attributes carry inherent quality variability and, given bounded rationality and imperfect information Simon, Simon, H.
Administrative behavior. New York: Macmillan. It is necessary to specify attributes and evaluate quality in order to transfer ownership.
These measurement costs are also called transaction costs. For Barzel Barzel, Y. For instance, the orange fruit can be broken down into several attributes, such as acidity, color, concentration of soluble solids, absence of pesticides that affect health, maturity level at harvest, harvesting and transportation responsibility, among others. It is possible to assign marginal payments for attribute variation, i. For instance, solids content or weight, as a payment unit, can define prices in contracts for purchasing oranges.
For solids content the first case , it is necessary to measure the soluble solid concentration attribute, which varies from fruit to fruit. Technical tests and accurate monitoring of measurement procedures are required to coordinate this transaction. In the second case, boxes of The measurement is simpler and easier to monitor, and evaluating the weight is more direct than evaluating solids content.
More complex measurement mechanisms frequently unveil more attributes, but also raise measurement cost; this logic will be important in the following pages. It is evident that transaction costs can arise from different contract terms, and the choice of these contractual terms are based on tradeoffs between costs and benefits of performing the measurement.
Recognizing the commodity as a bundle of attributes, and teking into account attributes quality variability, figure 1 represents the transaction, adapted from Zylbersztajn Zylbersztajn, D. Contracts and agreements: Shifter parameters in the measurement cost theory. The commodity is separated into n attributes, and it is possible to find different types of safeguards for each attribute, depending on the costs of measurement.
Thus, in the same commodity, more than one safeguard mechanism guarantees property rights. Note that attributes guaranteed by formal institutions, the judiciary and hierarchies have legal rights assigned to them, while private mechanisms have assigned economic rights. There are also attributes whose costs are prohibitively high, since benefits are less than the costs of measuring.
Attributes with prohibitive measurement costs - where costs are greater than benefits - are allocated in the public domain, and subsequently value dissipation occurs.
Property rights are guaranteed in different ways, just like the governance mechanisms proposed by Williamson Williamson, O.
Guarantees are chosen in order to minimize measurement costs. For the case of low measurement costs, i. As measurement costs increase, difficulties in adjudication arise within courts and new guarantees emerge through private mechanisms, contracts or vertical integration. When measurement costs become higher, more types of organization can be found. On the one hand, contracts are one of these types and they depend on courts, because contract terms are the reference for adjudication.
The quasi-judicial role of large retailers: an efficiency hypothesis of their relation with suppliers. Revue D'economie Industrielle, 92, The Economics of Block Booking. Journal of Law and Economics, 26 3 , Finally, vertical integration is hierarchical coordination executed within an organization.
As the definition of property rights depends on measuring a commodity's attributes, each attribute must be allocated into three different dimensions: legal rights, economic rights and the public domain Barzel, Barzel, Y. Zylbersztajn Zylbersztajn, D. Allocation of property rights depends on transaction costs, and the index ranges from 0 to 1 between two poles: 1 the first pole is the absence of transaction costs and the attribute is fully guaranteed by legal right; and 2 in the opposite pole, transaction costs are at maximum and property rights are in the public domain.
Figure 2 represents PRi and, in the real world, a commodity frequently presents attributes guaranteed by all property right dimensions. Figure 2 Property Rights Index. In effect, a transaction cannot be seen as a simple transference of property rights, but as a relationship that builds a framework for property rights allocation. The property rights structure is granted by different means, and the contract is only one of these means.
This paper focuses on the contract, because it defines which attributes are relevant in the transaction and how the parties distribute economic rents derived from each attribute.
Contract terms are essential to understand property rights structure. However, the process of contract terms selection has received little attention in literature, because economist frequently assume that terms are competitively chosen in order to maximize value creation. Barzel , p. Allen and Lueck 5 Allen, D. Thus, a theoretical model that explores the underlying process of contract terms selection in the presence of positive transaction costs is needed in order to understand two mechanisms in this process: competition and power the latter being the situation when there is insufficient competition.
The model analyzes contract terms selection in the presence of positive measurement costs as well as contractual failures. More specifically, with contracts being central, the model analyzes the delimitation of legal rights. As stated by Barzel Barzel, Y. Legal rights are the means of guaranteeing the consumption of these attributes.
Specifying a contractual provision, one party who has economic rights assigned by legal rights over an attribute will be able to appropriate economic rents from this attribute. Thus, in general, the model has the limitation of targeting only legal rights but, specifically, it fulfills the purpose of serving as an analytical tool for contracts.
Initially, we analyze a situation where contract terms are competitively chosen to ensure economic rights through legal rights contract and, then, we analyze the situation where competition is insufficient and contract power imposes additional costs in order to change the final allocation of property rights.
The construction of a contract involves costs and benefits of including or excluding contract terms. Therefore, our first task is to understand these costs and benefits, as well as how competition among contract terms can indicate those that will be selected by economic agents. First, assume that commodity attributes carry not only an internal variability, but also differ in their nature in terms of transparency and complicacy.
Contract structure and design in identity-preserved soybean production. Review of Agricultural Economics, 25 2 , Thus, when a commodity is taken, we can assume that some attributes are initially easy to measure, because there are attributes of direct measurement. After exhausting attributes of simple measurement, additional measurements become more difficult, because they require more complex techniques, given indirect measurement attributes.
Thus, we assume that it is possible to sort attributes by complicacy of measurement, from easy direct to difficult indirect measurement. Economic agents initially decide to include in contracts those attributes with direct easy measures and, then, they start to gradually include those attributes with indirect difficult measures.
In this sense, as more attributes are measured, measurement procedures become more complex, with indirect measurement attributes depending on more refined techniques and monitoring systems. We can assume, therefore, that as the level of complexity of measurement increases, more attributes are specified and included in the contract, which becomes more expensive due to measurement costs.
Under perfect competition, no measurement costs are needed and all attributes and prices are defined in legal rights. Conditions for perfect competition, however, are not found in the real world and contractual incompleteness arises from the impossibility of "presentiation" 1 1 "Presentiation" is the ability to present all factors that affect the contractual relationship.
It is some kind of perfect forecast. Macneil, Macneil, I. Contracts: Adjustments of long-term economic relations under classical, neoclassical and relational contract law. Northwest University Law Review, 72 6 , Thus, it is assumed that the contract is intended to specify most of the commodity attributes, i. Another assumption states that as more attributes are revealed, higher economic benefits can be obtained, because more economic rights over the attributes are delimited and the contract becomes more complete.
However, when the number of disclosed attributes is too large, the marginal benefit of revealing one more attribute is minor compared to the marginal benefit achieved when two attributes are revealed instead of just one. In other words, the economic benefits depend on the attributes revealed in the contract, but the marginal benefit of revealing attributes decreases.
Regarding measurement costs, as the complexity of a measurement system becomes greater, evaluating an additional attribute is even more difficult compared to evaluating the next attribute of the commodity. Thus, the measurement system becomes more expensive. In other words, when complexity is low, the cost of measuring an additional attribute is relatively small, compared to the situation in which complexity is high and the measurement cost of an additional attribute is relatively high as well.
In a situation where contract terms are selected competitively and transaction costs are positive, parties will negotiate until the maximization is obtained, represented by Figure 3 , where A c is the level of complexity of the measurement system quantity of attributes revealed or included in the contract and G c is the governance cost of the contract.
Level G c is the minimum measurement cost obtained by using contracts. A c , in turn, represents the level of contractual incompleteness, because it determines which attributes are viable to measure and which have prohibitive measurement costs. Figure 3 Competitive Contract Choice. Analyzing Figure 3 , we observe that attributes on the left of A c contain attributes specified in the contract. These attributes have quality standards, measurement methods, and monitoring procedures.
Attributes on the right of A c are attribute that remain unspecified in the contract. This model explains the formation of legal rights, which are the attributes on the left of A c. This feature of the model does not mean that unspecified to the right of A c attributes were placed into the public domain.
Unspecified attributes can be consumed through economic rights, but contracts do not define marginal payment for those attributes. Barzel 40 emphasizes in this idea that unspecified attributes can be consumed despite no legal rights being assigned: "among the unspecified attributes, some are subject to control by the buyer and some by the seller.
By 'control' I mean one's freedom to manipulate the particular unspecified attribute without making any marginal payment to others". The answer is more likely yes, even if you are tied to a contract. What may vary is the price you pay for terminating your plan. Are you on a contract-free plan forfait sans engagement? If so, this is the easiest type of plan to resign, plus you won't be charged. You can opt-out at any date you want.
Are you on a 12 or 24 months contract forfait sans engagement? If so, you'll likely be charged a fine depending on how long you had left until the end of the contract, and what your monthly plan costs. However, you may be exempt of paying this charge and will thus be able to leave your mobile phone plan without fines , as explained further down below.
That's possible! Simply take note of the number which will be read out to you, or refer to the SMS that should be sent to you right after. Get your cancellation timing right! Generally speaking, there is on average 10 days between the moment you request a cancellation and the moment it is enacted by your provider - just something to keep in mind before starting the process.
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