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

37 Pages Posted: 3 May 2004 Last revised: 21 Dec 2022

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Date Written: 1986

Abstract

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.

Suggested Citation

Polinsky, A. Mitchell, Fixed Price Versus Spot Price Contracts: a Study in Risk Allocation (1986). NBER Working Paper No. w1817, Available at SSRN: https://ssrn.com/abstract=227173

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