Asset Specificity and Long-Term Contracts: The Case of the Motion-Pictures Industry

The proliferation of long-term contractual arrangements between actors and studios in the U.S. motion-pictures industry during the Age of the Studio (1929-48) is analyzed. Asset specificity and transaction-cost minimization explain the optimality of long-term over short-term agreements. In particular, the following historical factors prove to have been pivotal in increasing the degree of relationship-specific investment and decreasing the costs of transacting: the high degree of both industrial concentration and vertical integration; the prevalence of a star-promotion system; the U.S. v. Paramount antitrust litigation; and the rise of television as a substitute form of entertainment.