Pricing the Right to Renege in Search Markets: Evidence from Trucking

TL;DR

This paper analyzes how flexible contracts with reneging rights in search markets, specifically trucking, impact welfare and market efficiency using a novel theoretical and empirical approach.

Contribution

It develops a dynamic model linking reneging options to bidding behavior and estimates it with real trucking data, revealing welfare implications.

Findings

Lowering cancellation penalties incentivizes carriers to bid more aggressively.

Flexible contracts are an efficient market outcome, not due to enforcement constraints.

The option to renege is priced into carrier bids, affecting contract design.

Abstract

In many search markets, advance interim contracts include an explicit right to renege, granting one party the option to switch to more attractive matches that emerge later in the search process. This paper studies the design and welfare implications of such interim contracts, leveraging novel data from a brokerage firm in the trucking industry. The broker allocates advance shipment contracts 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 enforcement.