American Economic Review Vol. 106 No. 11 2016
Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts
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.
- DOI
- 10.1257/aer.20150275
- Volume
- 106
- Issue
- 11
- Pages
- 3238-3274
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref