Fixed Price versus Spot Price Contracts: A Study in Risk Allocation
AbstractThi spaper is concerned with the risk-allocation effects of alternative types of contracts used to set the price of a good tobe delivered in the future. Under a fixed price contract, the price is specified in advance. Under a spot price contract, the price is the price prevailing in the spot market at the time of delivery.These contract forms are examined in the context of a market in which sellers have uncertain production costs and buyers have uncertain valuations. The paper derives and interprets a general condition determining which contract form would be preferred when the seller and/or the buyer is risk averse. In addition, an example is provided in which a spot price contract with a floor price is superior both to a "pure" spot price contract and a fixed price contract.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Journal of Law, Economics and Organization.
Volume (Year): 3 (1987)
Issue (Month): 1 (Spring)
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Other versions of this item:
- A. Mitchell Polinsky, 1987. "Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation," NBER Working Papers 1817, National Bureau of Economic Research, Inc.
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