When exchange requires specialized investments. Costs of extending the contract longer contracts take longer to negotiate. Benefits of extending the contract avoid costs of renegotiating contract. Site-specificity in the coal industry increased contract length by 12 years. Uncertainty that result from '74 oil embargo reduced contract length.
Agent pursues their own interests.
Separation of Ownership and Control Firm owned by stockholders Stockholders elect board of directors Board of directors hire managers. Successful managers build reputation that is rewarded with higher compensation. Takeovers Ineffective managers face replacement through competition for corporate control. Entrepreneurs profit by buying stock, taking-over the board of directors, replacing management, and enhancing the profitability of the firm. Incumbent management has incentive to be efficient.