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

Malin Arve and David Martimort

PSE-Ecole d'économie de Paris (Postprint) from HAL

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.

Keywords: Dynamic; Contract (search for similar items in EconPapers)
Date: 2016-11
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Citations: View citations in EconPapers (17)

Published in The American Economic Review, 2016, 106 (11), pp.3238-3274. ⟨10.1257/aer.20150275⟩

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Related works:
Journal Article: 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)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-01509599

DOI: 10.1257/aer.20150275

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