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

Richard Faltings

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.

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

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.

Paper Structure

This paper contains 57 sections, 1 theorem, 75 equations, 16 figures, 10 tables.

Table of Contents

  1. Introduction
  2. Literature Review
  3. Empirical setting and data
  4. Platform design
  5. Data and Stylized Facts
  6. Cancellation Behavior and Consequences
  7. Reputational Mechanism
  8. Baseline Model
  9. Setup
  10. Carrier policy
  11. Auction equilibrium
  12. Decomposing the effect of an increased penalty
  13. Optimal Cancellation Penalties
  14. Empirical Model
  15. Carriers
  16. ...and 42 more sections

Key Result

Lemma 1

Given a continuous and differentiable function $f(x)$ and continuous and differentiable distribution $G(x)$, define: Then the derivative of $h(x)$ is $h'(x) = G(f(x) - g(x) - c)f'(x) + (1-G(f(x) - g(x) - c))g'(x)$

Figures (16)

  • Figure 1: Funnel from views to matches
  • Figure 2: Confirmation/cancellation probability vs. payoff
  • Figure 3: Cumulative effects of an increased cancellation penalty
  • Figure 4: Social Welfare vs. Firm Profits
  • Figure 5: Features of the carrier search process
  • ...and 11 more figures

Theorems & Definitions (2)

  • Lemma 1
  • proof