Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation
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.
|Date of creation:||Jan 1986|
|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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- Paul Joskow, 1984. "Vertical Integration and Long Term Contracts: The Case of Coal Burning Electric Generating Plants," Working papers 361, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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 844-844.
- 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.
- Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-1082, December.
- 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.
- Shavell, Steven, 1976. "Sharing Risks of Deferred Payment," Journal of Political Economy, University of Chicago Press, vol. 84(1), pages 161-168, February.
- Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 317-328.
- Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-995, December. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1817. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.