EconStor >
ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/18836
  
Title:Contract adjustment under uncertainty PDF Logo
Authors:Holden, Helge
Holden, Lars
Holden, Steinar
Issue Date:2005
Series/Report no.:CESifo working papers 1472
Abstract:Consider a contract over trade in continuous time between two players, according to which one player makes a payment to the other, in exchange for an exogenous service. At each point in time, either player may unilaterally require an adjustment of the contract payment, involving adjustment costs for both players. Players? payoffs from trade under the contract, as well as from trade under an adjusted contract, are exogenous and stochastic. We consider players? choice of whether and when to adjust the contract payment. It is argued that the optimal strategy for each player is to adjust the contract whenever the contract payment relative to the outcome of an adjustment passes a certain threshold, depending among other things of the adjustment costs. There is strategic substitutability in the choice of thresholds, so that if one player becomes more aggressive by choosing a threshold closer to unity, the other player becomes more passive. If players may invest in order to reduce the adjustment costs, there will be over-investment compared to the welfare maximizing levels.
JEL:C72
E31
C78
C73
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

Files in This Item:
File Description SizeFormat
cesifo1_wp1472.pdf603.7 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/18836

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.