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Generous Long-Term Contracts

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  • Sylvain Chassang

Abstract

This paper argues that in long-term consumer–producer relationships, menus of contracts can often be advantageously replaced by a single generous contract such that, at any point in time, a consumer’s cumulative transfers equal the cumulative transfers they would have made under the contract that would have been best for them in hindsight. Such generous long-term contracts can increase skeptical consumers’ demand for complex and higher-powered contracts while approximately implementing the same outcomes as the underlying menu evaluated by a rational decision maker. Applications include voluntary load shedding in retail electricity markets and cost sharing in health insurance.

Suggested Citation

  • Sylvain Chassang, 2025. "Generous Long-Term Contracts," NBER Working Papers 34593, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34593
    Note: DAE DEV EEE EH IO PE
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    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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