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Simple Cost-Sharing Contracts

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  • Leon Yang Chu
  • David E. M. Sappington

Abstract

We extend William Rogerson's (2003) intriguing analysis of simple procurement contracts to settings where the supplier’s innate production cost is not necessarily distributed uniformly. Although the simple contract that Rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely, it can perform poorly when the larger cost realizations are relatively likely. We show that in all settings under consideration, a simple pair of contracts – one that involves linear cost sharing and one that involves full cost reimbursement – can always secure more than 73 percent of the gain achieved with a fully optimal contract. (JEL D86)

Suggested Citation

  • Leon Yang Chu & David E. M. Sappington, 2007. "Simple Cost-Sharing Contracts," American Economic Review, American Economic Association, vol. 97(1), pages 419-428, March.
    • Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:419-428
    Note: DOI: 10.1257/aer.97.1.419
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    References listed on IDEAS

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    1. F. Gasmi & J. J. Laffont & W. W. Sharkey, 1999. "Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(1), pages 61-93, March.
    2. Bower, Anthony G, 1993. "Procurement Policy and Contracting Efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 873-901, November.
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    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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