ABSTRACT
In Chapter 6 we developed the model of ‘perfect competition’ and in Chapter 7 we considered some features of health markets which cause the market to fail. One of the key features of the perfect competition model, which we have yet to consider, is that transactions are assumed to take place in a single instant. This assumption seems reasonable for the sale or purchase of a single item in a shop or market stall. However, many goods and services are not bought and sold through such one-off exchanges. Buyers and sellers may undertake an exchange of goods and services over a period of time and develop long-term relationships. Contracts are one method by which these relationships are developed. In this chapter we examine the economic rationale for a contract and issues related to the design of contracts.
