This study empirically investigates how uncertainty and specific investment determine contract duration. Using detailed individual labor contracts of Major League Baseball players, the empirical estimations find that, given that players are more risk-averse than clubs, contract length exhibits a positive relationship with the level of productive uncertainty. This implies that the risk-sharing hypothesis dominates the competing hypothesis of efficient production in individual labor contracts. Moreover, contract length is positively related to specific investment, highlighting that the prediction of the transaction cost theory also holds on individual labor contracts.
- Specific investment