Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts
- (pp. 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.Citation
Arve, Malin, and David Martimort. 2016. "Dynamic Procurement under Uncertainty: Optimal Design and Implications for Incomplete Contracts." American Economic Review, 106 (11): 3238-74. DOI: 10.1257/aer.20150275Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill