Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts

Malin Arve and David Martimort

American Economic Review, 2016, vol. 106, issue 11, 3238-74

Abstract: We characterize the optimal dynamic contract for a long-term basic service when an uncertain add-on is required later on. Introducing firm risk aversion has two impacts. Profits for the basic service can be backloaded to induce cheaper information revelation for this service: an Income Effect which reduces output distortions. The firm must also bear some risk to induce information revelation for the add-on. This Risk Effect reduces the level of the add-on but hardens information revelation for the basic service. The interaction between these effects has important implications for the dynamics of distortions, contract renegotiation, and the value of incomplete contracts.

JEL-codes: D21 D81 D82 D86 G32 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20150275
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
https://www.aeaweb.org/articles?id=10.1257/aer.20150275 (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... kV12Zj5iafxoJ1YlMa1I (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... FmgBO0zS6Ytyzn28X_gd (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts (2016)
Working Paper: Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:106:y:2016:i:11:p:3238-74

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().