American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Simple Cost-Sharing Contracts
American Economic Review
vol. 97,
no. 1, March 2007
(pp. 419–428)
Abstract
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)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.97.1.419Additional Materials
JEL Classification
- D86 Economics of Contract: Theory