The choices that market participants make to govern transactions are at the very foundation of exchange. Consequently, a rich literature on contracting has developed in modern economics. While the extant empirical literature tests various elements of the transaction cost framework around market governance, two common features of this literature are limiting.

First, the vast majority of empirical analyses of contract research are cross-sectional in nature. That is, most research examines, at a moment in time, whether differences in either the market or transaction characteristics of the exchange cause systematic differences in the observed market governance mechanism. The propensity to use one exchange governance mechanism or another, however, may evolve over time and even for similar transactions within the same market. For example, drawing from our empirical setting of U.S. freight railroad shipments, we observe that the share of shipments employing contracts rather than spot markets has evolved dramatically over time. While it is possible that explanations for this pattern may be found within the existing theoretical framework, additional examination of such intertemporal variation at a minimum provides a fresh lens on, and test of, existing theory. Even more promising, examinations of intertemporal variations in the use of exchange governance mechanisms may reveal new theoretical drivers that have not arisen in a cross-sectional context.

Second, economists have long recognized a spectrum of alternative market governance mechanisms, ranging from spot markets, to short- and long-run contracts and to vertical integration. Much of the extant empirical research examines the canonical make-versus-buy decision. In short, the empirical study of contracts has overwhelmingly focused on the choice between vertical integration and the use of contracts and on various features of contracts such as their duration, price structure and completeness. Far less attention has been focused on the more primal question of whether parties choose to use contracts at all.

This paper relaxes both these constraints by drawing on an extensive database of over 15 million transactions in the U.S. freight rail industry over 1987-2014. The results reveal new drivers of the observed propensity to use contracts, including both legislative and competitive. The results also underscore the role of transactions cost considerations in the decisions by market participants to utilize contracts. Consistent with the light-touch regulatory approach adopted in the industry since 1980, the results provide no indication that the use of contracts has been driven by strategic posturing to avoid regulation.