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Simple Cost-Sharing Contracts

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  • Leon Yang Chu
  • David E. M. Sappington

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)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.1.419
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 419-428

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:419-428

Note: DOI: 10.1257/aer.97.1.419
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  1. Bower, Anthony G, 1993. "Procurement Policy and Contracting Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 873-901, November.
  2. F. Gasmi & J. J. Laffont & W. W. Sharkey, 1999. "Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 61-93, 03.
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Cited by:
  1. Eugenio Miravete, 2007. "“Competing with Menus of Tariff Options”," Working Papers 07-02, NET Institute, revised Jul 2007.
  2. Gagnepain, Philippe & Ivaldi, Marc & Martimort, David, 2010. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," IDEI Working Papers 637, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Chu, Leon Yang & Sappington, David E.M., 2009. "Procurement contracts: Theory vs. practice," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 51-59, January.
  4. Loertscher, Simon & Niedermayer, Andras, 2014. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Working Papers 14-03, University of Mannheim, Department of Economics.
  5. Sheriff, Glenn, 2009. "Implementing second-best environmental policy under adverse selection," Journal of Environmental Economics and Management, Elsevier, vol. 57(3), pages 253-268, May.

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