Long-Term Contracts, Irreversibility, and Uncertainty

10 March 2016 12:51

(updated: 7 September 2017 12:32)

Long-Term Contracts, Irreversibility, and Uncertainty

The article "Long-Term Contracts, Irreversibility, and Uncertainty" by Maline Arve is forthcoming in the Journal of Public Economic Theory.

The article "Long-Term Contracts, Irreversibility, and Uncertainty" by Maline Arve  is forthcoming in the Journal of Public Economic Theory.

Abstract:

Long-term contracting implies contracting based on expected future demand. In this paper, I develop a multiperiod procurement model where, once the actual level of demand is realized, the irreversible initial provision level may be supplemented by additional provisions. This paper shows that, with the possibility of additional upward adjustments, the first-period provision level will be lower than when no additional adjustments are possible. This reduction in first-period provision level is higher under complete contracting than under incomplete contracting, and because of the reduction in information rents it yields a higher expected utility to the principal but lower total welfare.