ABSTRACT
This paper examines the nongovernmental repeat-purchase contract-enforcement mechanism. To isolate this force, we assume throughout our analysis that contracts are not enforceable by the government or any other third party. Transactors are assumed to rely solely on the threat of termination of the business relationship for enforcement of contractual promises.3 This assumption is most realistic for contractual terms concerning diffi cult-to-measure product characteristics such as the “taste” of a hamburger. However, even when the aspects of a contract are less complicated and subjective
and therefore performance more easily measurable by a third party such as a judge, specifi cation, litigation, and other contract-enforcement costs may be substantial. Therefore, explicit guarantees to replace or repair defective goods (warranties) are not costless ways to assure contract performance. Market arrangements such as the value of lost repeat purchases which motivate transactors to honor their promises may be the cheapest method of guaranteeing the guarantee.
