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Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation

  • A. Mitchell Polinsky

Thi 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1817.

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Date of creation: Jan 1986
Date of revision:
Publication status: published as Polinsky, A. Mitchell. "Fixed Price versus Spot Price Contracts: A Study in Risk Allocation," Journal of Law, Economics, and Organization, Vol. 3, No. 1, (Spring 1987), pp. 27-46.
Handle: RePEc:nbr:nberwo:1817
Note: EFG
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  1. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
  2. Joskow, Paul L, 1985. "Vertical Integration and Long-term Contracts: The Case of Coal-burning Electric Generating Plants," Journal of Law, Economics and Organization, Oxford University Press, vol. 1(1), pages 33-80, Spring.
  3. Alan J. Marcus, 1982. "Risk Sharing and the Theory of the Firm," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 369-378, Autumn.
  4. Feder, Gershon & Just, Richard E & Schmitz, Andrew, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 317-28, March.
  5. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
  6. H. Stuart Burness & W. David Montgomery & James P. Quirk, 1980. "The Turnkey Era in Nuclear Power," Land Economics, University of Wisconsin Press, vol. 56(2), pages 188-202.
  7. Shavell, Steven, 1976. "Sharing Risks of Deferred Payment," Journal of Political Economy, University of Chicago Press, vol. 84(1), pages 161-68, February.
  8. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December.
  9. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75, pages 844.
  10. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  11. J.K. Sebenius & P.J.E. Stan, 1982. "Risk-Spreading Properties of Common Tax and Contract Instruments," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 555-560, Autumn.
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