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Generous Long-Term Contracts

Author

Listed:
  • Sylvain C. Chassang

    (Princeton University)

Abstract

I argue that in long-term consumer–producer relationships, menus of contracts can be advantageously replaced by a single generous contract such that, at any point in time, the sum of a consumer’s transfers is equal to the sum of transfers they would have made under the contract that is the 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 C. Chassang, 2026. "Generous Long-Term Contracts," Working Papers 354, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:354
    as

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    File URL: https://gceps.princeton.edu/wp-content/uploads/2026/07/wp354_Chassang_LongTermContracts.pdf
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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