NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fixed Price Versus Spot Price Contracts: A Study in Risk Allocation

A. Mitchell Polinsky

NBER Working Paper No. 1817 (Also Reprint No. r0939)
Issued in 1986
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w1817

Published: 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. citation courtesy of

 
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