Generous Long-Term Contracts

Sylvain Chassang

No 34593, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that in long-term consumer–producer relationships, menus of contracts can often be advantageously replaced by a single generous contract such that, at any point in time, a consumer’s cumulative transfers equal the cumulative transfers they would have made under the contract that would have been best for them in hindsight. Such generous long-term contracts can increase skeptical consumers’ demand for complex and higher-powered contracts while approximately implementing the same outcomes as the underlying menu evaluated by a rational decision maker. Applications include voluntary load shedding in retail electricity markets and cost sharing in health insurance.

JEL-codes: D47 D82 D86 I13 Q41 (search for similar items in EconPapers)
Date: 2025-12
Note: DAE DEV EEE EH IO PE
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