American Economic Review: Vol. 97 No. 1 (March 2007)


Quick Tools:

Print Article Summary
Export Citation
Sign up for Email Alerts Follow us on Twitter


AER - All Issues

AER Forthcoming Articles

Simple Cost-Sharing Contracts

Article Citation

Chu, Leon Yang, and David E. M. Sappington. 2007. "Simple Cost-Sharing Contracts." American Economic Review, 97(1): 419-428.

DOI: 10.1257/aer.97.1.419


We extend William Rogerson's (2003) intriguing analysis of simple procurement contracts to settings where the supplier’s innate production cost is not necessarily distributed uniformly. Although the simple contract that Rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely, it can perform poorly when the larger cost realizations are relatively likely. We show that in all settings under consideration, a simple pair of contracts – one that involves linear cost sharing and one that involves full cost reimbursement – can always secure more than 73 percent of the gain achieved with a fully optimal contract. (JEL D86)

Article Full-Text Access

Full-text Article

Additional Materials

Link to Appendix (243.74 KB)


Chu, Leon Yang
Sappington, David E. M.

American Economic Review

Quick Tools:

Sign up for Email Alerts

Follow us on Twitter

Subscription Information
(Institutional Administrator Access)


AER - All Issues

AER - Forthcoming Articles

Virtual Field Journals

AEA Member Login:

AEAweb | AEA Journals | Contact Us