Long term contracts

Transcription

Long term contracts

Lehrstuhl für
Industrie, Energie und Umwelt
Int. Industrial Management I
Long term contracts
| Prof. Franz Wirl |
office hour thursday 9 – 10
Email: [email protected]
Homepage:http://bwl.univie.ac.at/ieu
Office: Carmen Gruber 38102, Tuesday & Thursday: 10 –12
Universität Wien
Fakultät für Wirtschaftswissenschaften
Lehrstuhl für Industrie, Energie und Umwelt
Brünner Straße 72, 1210 Wien
Lehrstuhl f. Industrie, Energie und Umwelt
Type of Contracts
based on Perloff
 If Paul hires Amy to run his ice cream shop, Amy needs Paul’s shop
and Paul needs Amy’s efforts to sell ice cream.
 The profit from the ice cream sold, π, depends on the number of hours,
a, that Amy works.
 The profit may also depend on the outcome of θ, which represents the state
of nature:
π = π(a, θ).
 Three common types of contracts:
fixed-fee,
hire
contingent contracts.
| Prof. Wirl WS 2010/11
Seite 2
Types of Contracts
Fixed-Fee Rental Contract.
If Amy contracts to rent the store from Paul for a fixed fee, F.
© 2009 Pearson Addison-Wesley. All rights reserved.
20-3
Types of Contracts
 Hire contract - the payment to the agent depends on the agent’s
actions as they are observed by the principal.
 Two common types of hire contracts pay employees:
 an hourly rate
 a piece rate
20-4
Types of Contracts
 Contingent contract - the payoff to each person depends on the state
of nature, which may not be known to the parties at the time they write
the contract.
 splitting or sharing contract - the payoff to each person is a fraction of the
total revenues or profit
20-5
Efficiency
 efficient contract - an agreement with provisions that ensures that no
party can be made better off without harming the other party.
 efficiency in production - situation in which the principal’s and agent’s
combined value (profits, payoffs), π, is maximized
 efficiency in risk bearing - a situation in which risk sharing is optimal
in that the person who least minds facing risk—the risk-neutral or less
risk-averse person— bears more of the risk
20-6
Constraints
 A contract must satisfy two properties:
 the contract must provide a large enough payoff that the agent is willing to
participate in the contract.
 the contract must be incentive compatible:
 it provides inducements such that the agent wants to perform the assigned task
rather than engage in opportunistic behavior.
20-7
Efficient Contract
 Paula, the principal, owns a store called Buy-A-Duck (located near a
canal) that sells wood carvings of ducks.
 Arthur, the agent, manages the store. Paula and Arthur’s joint profit is
π (a) = R(a) − 12a
 where R(a) is the sales revenue from selling a carvings, and 12a is the cost
of the carvings.
20-8
Fixed-Fee Rental Contract.
 If Arthur contracts to rent the store from Paula for a fixed fee, F, joint profit
is maximized.
 Arthur earns a residual profit equal to the joint profit minus the fixed rent he
pays Paula, π(a) − F.
 The amount, a, that maximizes Arthur’s profit, π(a) − F, also maximizes joint
profit, π(a).
20-9
Hire Contract
 Paula contracts to pay Arthur for each carving he sells.
 If she pays him $12 per carving, Arthur just breaks even on each sale.
 Even if he chooses to participate, he does not sell the joint-profitmaximizing number of carvings unless Paula supervises him.
 If she does supervise him, she instructs him to sell 12 carvings, and she
gets all the joint profit of $72.
 Paula keeps the revenue minus what she pays Arthur, $14 times the
number of carvings,
R(a) − 14a.
 Because Paula’s marginal cost, $14, is larger, she directs Arthur to sell
fewer than the optimal number of carvings.
20-10
Revenue-Sharing Contract.
 If Paula and Arthur use a contingent contract whereby they share the
revenue, joint profit is not maximized.
 Suppose that Arthur receives three-quarters of the revenue, 3/4R, and
Paula gets the rest, 1/4R.
 Thus Arthur maximizes
3/
4R(a)
− 12a
which does not yield the efficient outcome.
20-11
Profit-Sharing Contract
 Paula and Arthur may instead use a contingent contract by which they
divide the economic profit, π, i.e., Arthur maximizes
α(R(a) − 12a)
which yields the profit maximizing effort if they can agree that the true
marginal and average cost is $12 per carving (which includes Arthur’s
opportunity cost of time). The reason is that Arthur wants to sell the
optimal number of carvings.
20-12
Production Efficiency and Moral Hazard
Problems for Buy-A-Duck
20-13
Long term contracts
 Longterm contracts
 Advantages over spot market transactions
 Hedging transaction specific investment
 Risk hedging
 Transaction cost saving
 Screening, partner selection
 Advantages over vertical integration
 Less hierarchy
 Independence of companies
 Outsourcing
 Externalising of the damage - Illegitimate
Seite 14
Contract types
 Contract types in context of industrial relationships:
 Spotmarkettransactions
 Longterm contracts
 [Networks, Cluster]
Intensity of cooperation
 Vertical Integration
 Longterm contracts:
 Time of the conclusion of a contract and the realisation are apart.
 Contract with the aim of a longterm cooperation between legally
independent actors.
 Fundamental transformation from many to few (Williamson)
Seite 15
Contract types
Spot market transactions
Longterm contracts
Networks, Cluster
vertical Integration
Strategic alliances
 Extreme points:
 Spot market contracts:
No binding between the partys.
Agreement about the good and the price at a certain date – underlying
price: spot market price
 Vertical Integration:
Unique lead and control of two formerly independent partys.
Maximal mutual commitment
Seite 16
Longterm contracts
 Generally most transactions are between the extrema of spot market
transactions and full integration.
 Longterm contracts can be characterized by more ore less strong
binding, more than spot market transactions less than vertical
integrations.
 With longterm contracts all partys have control rights over everything
that is not specified in the contracts (so called residual control rights).
Seite 17
Longterm contracts
Advantages to spotmarkettransactions
 Possible advantages of longterm contracts compared with
spot market transactions:
 Hedging of transaction specific investment
 Hedging risk
 Saving of transaction costs
 Outsourcing of specific risks (illegal)
Seite 18
Longterm contracts
Hedging of transactionspecific investment
 Possible advantages of longterm contracts compared to
spot market transactions:
 Hedging of transaction specific investment
 Hedging risk
 Saving transaction costs
 Outsourcing of specific risks (illegal)
Seite 19
Longterm contracts
 Hedging of transaction specific investment:
 Hedging of profits on transaction specific investment.
 Transaction specific investment: Expenses for special locations, machines,
tools, materials, technologies, company specific qualifications of
employees, etc.
 Such investments are often necessary to adjust the work to the needs of
the buyer or seller.
Seite 20
Longterm contracts
 Transaction specific costs are mostly sunk costs
(recall the difference between sunk and fixed costs)
 In order that an investment turns profitable, the investor has to ensure
that he can sell his products at sufficiently high prices (i.e., above unit
or marginal production costs), or at the buyer‘s side (also the buyer
may undertake specific investments), to obtain the service or good at
low prices.
 If the original planned performance can not be done/kept, the investor
has to look at the second best alternative. In the extreme, a facility is
without any value if a transaction does not take place, because the
facility depends entirely on the specific good/input.
Seite 21
Longterm contracts
Hedging of transaction specific investment
 Analytic
 Suppose a supplier can lower his production costs c(k) because of specific
investment k. The cost decrease can only be realised if he delivers to a
certain buyer (special machine, which makes a cheaper production of
certain goods possible).
 If the transaction does not take place and delivery is to another byuer, the
specific investment is devalued because the cost reduction is linked to the
specific transaction.
 The buyer‘s value of the good is:
v = buyer´s maximum willingness to pay.
Seite 22
Longterm contracts
 Production costs (c) depend on the level of specific investment (k):
€
v
c(k)
k
Seite 23
Longterm contracts
 Spot market transaction:
 If the price is negotiated after the implementation of the investment, the following
problem occurs:
 Due to the fact that specific investments are sunk costs, which are irreversible due to
the current decisions of the seller, he will ask for a price at least at the level of the
(curent) production costs c(k).
 The buyer however will just offer at the maximum of the value of the good v.
 Assumption: The surplus from the transaction will be split 50:50.
This follows from
either the Nash-Bargaining Solution
or the non-cooperative solution of the Rubinstein-game.
Seite 24
Longterm contracts
Insert – Explanations of 50-50 surplus split
 Reason 1: Nash Bargaining (simplified).
 Reason 2: Rubinstein-game:
Two partners have to agree about sharing a cake (here the surplus v - c). One of them
proposes an allocation. If the other accepts, the game is over and the cake gets shared.
If not, the role of the proposer changes, the rest remains like in the first round, but the
cake shrinks from round to round. The game is repeated as long until an allocation gets
accepted. If the discount rate is big enough, or the cake shrinks quickly enough, then a
50% to 50% allocation in the first round is an equilibrium (more precisely, a subgame
perfect non-cooperative Nash equilibrium, but only one among many).
 Reason 3: Experiments (ultimatum game)
Seite 25
Long term contracts
 Spot market transaction:
 Surplus of the seller:
pS ( k ) − c ( k )
 Surplus of the buyer:
v − pS (k )
 Spot market price:
(Nash bargaining ex post)
 Seller´s profit:
v − pS (k ) = pS (k ) − c(k )
pS (k ) =
c(k ) + v
2
max G = pS ( k ) − c( k ) − k
k
v + c( k )
− c( k ) − k
2
!
dG
c' ( k )
=−
− 1= 0
dk
2
c ' ( k ) = −2
G=
Seite 26
Longterm contracts
 c‘(k) = -2
i.e., investment level is suboptimal, because the last € spent must reduce the
production costs by 2€.
 What is the efficient investment level? Maximize total surpls:
max G = v − c(k ) − k
k
!
dG
= −c ' ( k ) − 1 = 0
dk
c' (k ) = −1
 c´(k) = -1
is optimal, because spending an additional € reduces the costs by 1€.
Seite 27
Long term contracts
 The problem of suboptimal investment levels occurs, because specific
investments as sunk costs do not have an impact on the negotiations.
 This problem can be solved by making longterm contracts between the
parties ex ante (meaning before the specific investment) and by an
agreement on the price.
 In such a situation the seller will require a minimum price, which covers
the total investment- and production costs:
(k + c(k)).
Seite 28
Longterm contracts
 Nash-Bargaining Solution (pv = contract price)
v − pV ( k ) = pV ( k ) − c( k ) − k
pV ( k ) =
v + c(k ) + k
2
 The seller determines his optimal profit maximizing investment level:
max G = pV (k ) − c(k ) − k
k
v + c(k ) + k
2
dG
c' (k ) 1 !
=−
− =0
dk
2
2
c' (k ) = −1
wobei : pV (k ) =
 Since c‘(k) = -1 specific investments are efficient.
Seite 29
Example
4
4
Production costs:
c(k ) = 3 − k
1
c' (k ) = −
2 k
3
3
1
1
0
0
0
0
-3
-3
pS (k ) =
v + c(k )
2
max G s = pS (k ) − c(k ) − k = v −
k
!
∂G s
1
1
=
−1 = 0 ⇒ k =
∂k 4 k
16
0.1
0.1
0.3
0.3
0.4
0.4
0.5
0.5
0.6
0.6
0.7
0.7
0.8
0.8
0.9
0.9
1
1
c’(k)
c’(k)
Long term (ex-ante) contract:
pV (k ) =
3− k
−k
2
0.2
0.2
-1
-1
-2
-2
Spot transaction (ex post):
c(k)
c(k)
2
2
v + c(k ) + k
2
max G v = pV (k ) − c(k ) − k =
k
v − c(k ) − k
2
1
1
1
∂G v
=
− =0 ⇒ k =
∂k 4 k 2
4
Seite 30
Long term contracts
 Hedging of transaction specific investment - summary:
 One of the main reasons for longterm contracts is that one of the parties
wants to hedge its specific investments (sunk costs).
 Such a hedge is not possible in the spot market, because any negotiation
will ignore sunk costs and focus only on the variable costs. Anticipation of
this leads to suboptimal investments.
 The long term contracts allow for the consideration of sunk costs such that
optimal investment becomes feasible (i.e., profitable for the involved seller,
but analoguously als for the seller if the seller has to invest).
Seite 31
Complete contingency contracts (Arrow-Debreu) and
their different kinds of implementations
t
t=0
contracting specific
investments
0<δ<1
k s, k b
discount
factor
Realisations
θ∈{1,…,n}
t=1
action
aijθt
i ∈ {s, b}
j∈{1,…n}
t=T
Action
aijθT
max ∑ δ t E [Wt (ki , aijθt )]
T
Objective:
aijθt
t =0
Seite 32
 Arrow-Debreu: The NPV of profits can be maximized by complete contingency
contracts (a crucial assumption for proving the Invisible Hand Theorem).
 Contract prices ptv are indeterminate , as long as they imply the same net present
value of profits to the partys. Therefore, different contracts and combinations are
possible:
1. Buyer offers a one-time payment at the beginning:
pV = {p0 > 0 , pt = 0, t = 1, …, T}
2. Buyer pays at the end:
pV = {pT > 0 , pt = 0, t = 0, …, T - 1}
3. Buyer pays after each delivery the same price:
pV = {p0 = 0 , p1 = p2 … = pT}
4. Buyer pays at delivery and offers/requires compensation for non-delivery
depending on the environment θt∈ θ = {1,…n}
θ ⊂ θ supplies at the prices p (θ )
t
θ
no supplies, θ ⊂ θ , θ ∩ θ = ∅, θ ∪ θ = θ
Seite 33
Example for different contingency contracts
Quality of
the product
seller´s costs
Value of the product for the buyer
depending on the states of nature
Variable
costs
θ=1
θ=2
θ=3
k
c
v1
v2
v3
qH
100
2.000
8.000
4.000
1.000
qL
100
1.000
6.000
3.400
500
Specific
Investment
t ∈ {0, 1}, δ = 0.9 (i.e., 10% discounting)
θ uniformly distributed
Value of alternatives: seller = € 1000, buyer = € 500
Seite 34
Optimal Actions in a complete contingency contract
θ =1
θ =2
θ =3
8000 − 2000 = 6000  q H
W1 = 
6000 − 1000 = 5000  q L
⇒ a11s = q H
4000 − 2000 = 2000  q H
W2 = 
3400 − 1000 = 2400  q L
⇒ a12s = q L
1000 − 2000 = −1000 q H
W3 = 
500 − 1000 = −500 q L
⇒ a13s = 0
NPV
Outside options: Seller 1000, Buyer 500
Contract gain: = 2420 – (1000 + 500) = 920
Seller: 1000 + ½* 920 = 1460
All contract prices that deliver these
Buyer: 500 + ½* 920 = 920
payoffs are feasible optimal contracts
Seite 35
Contract with ex ante payment
Buyer pays seller ex ante 2460 and receives the optimal deliveries:
Profit Buyer
Profit Seller
Seite 36
Alternatives
Ex post: 2733
Contingent on state θ:
Seite 37
Requirements:
Ex- Ante:
 Anticipation of all possible events
 Determination of the optimal decisions
 Distribution of the profits from cooperation
 Determination of the cash flows
Ex-Post:
 Verification
 Enforceability
Seite 38
Incomplete longterm contracts
Reasons for incomplete contracts:
Ex- Ante
- complicated
- Limited rationality
- Unpredictability (9/11)
Ex- Post
- Quality often poorly observable
- Even less enforceable
Seite 39
Incomplete longterm contracts
Oliver Williamson (Nobel prize 2009): Bounded Rationality – Contract partys are
susceptible to ex post opportunism.
Benedict de Spinoza*:
“As a necessary consequence of the principle just enunciated, no one can
honestly forego the right which he has over all things, and in general no one will
abide by his promises, unless under the fear of a greater evil, or the hope of a
greater good…Hence though men make promises with all the appearances of
good faith, and agree that they will keep to their engagement, no one can
absolutely rely on another man’s promise unless there is something behind it.
Everyone has by nature a right to act deceitfully, and to break his compacts,
unless he be restrained by the hope of some greater good, or the fear of some
greater evil.”
* A Theologico-political treatise: A political treatise, 1670/1951, New York Dover, p 203 – 204, from Hartmut Kliemt, Public Choice 125, 203-213.
Seite 40
Contract interest, economic dependency, quasi rent
pv
t
r
Ex ante
contract price
time, t ∈ {0,…,T}
interest rate
seller (s)
buyer (b)
K = investment induced by contract
ks = amortized investment costs
c = variable costs
vt = value of the contract for the buyer
pbmax,0 = v0 = maximum price (t = 0)
psmin,0 = c + ks = minimum price (t = 0)
psmin,t = c + st = minimum price t > 0
where st includes
at least the annuity
from scrapping
Seite 41
Contract interests, ex ante & ex post
ks = sunk costs, st = scrap value
Ex ante
Ex post
Interest
seller
buyer
Interest
seller
buyer
positive
pv – (ks + c)
v0 - pv
positive
pv – (st + c)
vt - pv
negative
0
0
negative
0
0
concrete
pv – (ks + c)
v0 - pv
concrete
pv – (st + c)
vt - pv
Profit from cooperating:
pbmax,0 - psmin,0 = v0 – (ks + c)
Profit from cooperating:
vt – (st + c)
Cooperation profit ex-post is (much) higher than ex-ante
Seite 42
Example: contract interest, ex ante & ex post
Seller
plant, 106 €, 5a, 12% interest =>
ks = 21936 per month,
st = 219 (Scrap value = 10000).
c = 15000 per month => psmin,0 = 36936
Alternatives:
ex ante profit of 1000 per month
Ex post, sales at €20000 per month.
Assumption: pv = 40000 (per month)
Buyer:
v0 = 50000 (per month)
Alternative: supply of €41000 ex ante,
vt =50500, €41500 ex post
⇒ Strong shift of the contract
interests from 1:2 to 1:10 for seller.
Before signing the contract (monthly)
Interest
seller
buyer
positive
3064
10000
negative
1000
9000
concrete
2064
1000
After signing
Interest
seller
buyer
positive
24781
10500
negative
4781
8500
concrete
20000
2000
Seite 43
Example: contract interest, ex ante & ex post
Seller
facility, 106 €, 5a, 12% interest =>
ks = 21936 per month,
st = 219 (Scrap value = 10000).
c = 15000 per month => psmin,0 = 36936
Alternatives:
ex ante profit of 1000 per month
Ex post, sales at €20000 per month
Assumption: pv = 40000 (per month)
Buyer:
v0 = 50000 (per month)
Alternative: supply of € 41000
vt =50500
⇒Strong shift of contract
Interests from 1:2 to 1:10.
Before signing the contract
Interest
positive
seller
mon.
NPV
3064 139681
buyer
mon.
NPV
10000 455878
negative
1000
45588
9000
410290
concrete
2064
94093
1000
45588
After signing the contract
Interest
seller
buyer
positive
24781 129711
10500 478672
negative
4781
217955
8500
387496
concrete
20000 911756
2000
91176
Seite 44
Quasi-rent and hold-Up
 It is often difficult to find rules to enforce economically justified costs
e.g.: electricity in California, 2001.
 Incomplete contracts offer quasi rents (ex post) through hold up.
 Examples :
Peach plantation:
fruit value: $400000 (ex post = ripe)
labor contract costs: $ 45000
Claims: $ 390000 or $ 50000 (bad weather).
 Moral Hazard – e.g. Building delays.
Seite 45
Examples
from Business how to avoid the Hold-Up problem
 Printing industry
book printing versus daily newspapers
 Oil industry
strong differences over time,
vertical integration until 1973, splitted since then
 Agriculture, different contract forms
(Lease, purchase, harvest sharing).
Seite 46
Longterm contracts
Advantages to spot market transactions
Spot market transactions:
 Hedging of transaktionspecific investment
 Risk hedging
 Saving of transaction costs
 Outsourcing of specific risks (illegal
Seite 47
Long term contracts
risk hedging
 Basic assumption:
 Either the buyer or the seller is risk averse and this is the following the
only reason for a long term contract.
 Risk averes means, that one party would prefer a fixed payout over a
lottery with the same expected profit.
 Y is the fluctuating income with:
Y ∈ { y1 , y2 }
( y1 + y2 )
E (Y ) = y =
2
 y1 is the low income and y2 the high income.
 U is a concave utility function.
Seite 48
Longterm contracts
risk hedging
 Given is the income Y and the utility function U, then:
U (E (Y )) > E (U (Y )) = E (Y ) − rVar (Y )
 Whereas r is the measure of the risk aversion and Var the variance
of the income (Markowitz!)
 In this sense, a longterm contract is de facto the purchase of an
insurance policy.
Seite 49
Longterm contracts
hedging risk
 Repetition:
 Risk averse:
U (E (Y )) > E (U (Y ))
 Risk neutral:
U (E (Y )) = E (U (Y ))
 (Risk friendly):
U (E (Y )) < E (U (Y ))
Seite 50
Longterm contracts
risk hedging
 Exkursion/Repetition: Utility function of a risk avers individual:
U (E (Y )) > E (U (Y ))
U(Y)
U(E(Y))
U(Y2 )
U(E(Y))
E(U(Y))
U(Y1 )
Y1
Ŷ
E(Y)
Y2
Y
R
Seite 51
Longterm contracts
Risk hedge
 Assuming normal distributed random variables the benefit of each party
(buyer, seller) can be presented as follows:
U = E (Y ) − rVar (Y )
 The optimal distribution of risk due to cost uncertainty?
 The minimal price a seller would accept ex ante, at expected costs c, a risk
aversion rs, and a profit Gs (based on certainty equivalence):
s
pmin
= c + r sVar (G s )
 Analogue, the maximum price a buyer would pay ex ante, given his value
assessment v, the profit Gb, and his riskaversion rb:
b
pmin
= v − r bVar (G b )
Seite 52
Longterm contracts
Risk hedge
 Assuming normal distributed random variable of the costs (c with mean c),
the benefit of each party (buyer, seller) can be presented as follows:
U = E (Y ) − rVar (Y )
 The optimal distribution, a for buyer, 1 – a for seller of risk?
 The minimal price a seller would accept ex ante, at expected costs c, a risk
aversion rs and a profit Gs (based on certainty equivalence):
s
pmin
= c + r sVar (G s ),Var (G s ) = Var ((1 − a )c),
 Analog the maximum price a buyer would pay ex ante, given his value
assessment v, the profit Gb, and his riskaversion rb:
b
pmin
= v − r bVar (G b ),Var (G b ) = Var (ac)
Seite 53
Longterm contracts
Risk hedge
 The optimal risk distribution in a contract is presented by a*.
GE
 Optimal risk allocation at a*
= where the difference
between the 2 curves is a maximum.
 In the optimal case this
v
risk allocation is characterized by the
fact that the marginal risk premium
equals the marginal insurance
premium, so the curves have the
c
same gradient at point a*.
psmin(a)
pbmax(a)
amin
a*
amax
1
a
Seite 54
Longterm contracts
Risk insurance: demand risk and supply risk
 Fixed price contracts vs. spot market transactions
 2 cases are considered:
 Uncertainty on the demand side
 Uncertainty on the supply side
 In both cases each party wants to hedge against fluctuations of the demand and the
supply side.
 Therefore so called fixed price contracts allow to allocate risks and they are mostly
longterm contracts (longterm supply contracts and longterm purchase contracts).
Seite 55
Supply (cost) uncertainty (c is stochastic)
Imperfectly elastic supply to shocks
Perfectly elastic supply
p
Δp
=
Δc
p
p2
S2
S1
p1
Δp
≠
Δc
S2
p2
p1
S1
D
D
x2
x1
x
x2
x1
x
A risk averse seller will prefer a spot price contract over of long term contract since of less
variance in the profit (the cost shocks affect the spot price).
In contrast a risk averse buyer prefers a long term contract.
Seite 56
Demand Uncertainty (v stochastic)
Perfectly inelastic supply
p
Imperfectly elastic supply
S
p
S
Δp
=
Δv
Δp
≠
Δv
p1
p2
D1
p1
D1
p2
D2
D2
x
x2
x1
x
A risk averse buyer will prefer a spot price contract over of long term contract since that
insures him against the loss in the product he acquires (for selling).
A risk averse seller in contrast prefers a fixed price contract because that insures him.
Seite 57
Longterm contracts
 Demand risk
Numerical example:
Long term contract (LV)
Gs = p − c
_
_
c = 2; p = 7; v1 = 10; v2 = 5
Gb = v − p
Spot market transaction (SMT)
G s (v ) = p (v ) − c
G (v ) = v − p (v )
b
Assumption :
v stochastic
c = c  constant, fixed production costs
p = p  fixed price int longterm contract
p(v) = v − c( x ) spot market price
LV:
Gs(v1) = 7 - 2 = 5
Gs(v2) = 7 - 2 = 5
Gb(v1) = 10 – 7 = 3
Gb(v2) = 5 – 7 = -2
SMT: p(v1) = 10 – 2 = 8
p(v2) = 5 – 2 = 3
secure
Risk
Δp = Δv = 5
Gs(v1) = (10 – 2) – 2 = 6
Gs(v2) = (5 – 2) – 2 = 1
Gb(v1) = 10 – (10 – 2) = 2
Gb(v2) = 5 – (5 – 2) = 2
Risik is
transfered from
the seller to the
buyer because of
LV. The seller
insures himself
against risk. ab.
Risk
secure
Seite 58
Longterm contracts
 Supply risk
Numerical example:
Longterm contract (LV)
_
_
v = 9; p = 7; c1 = 2; c2 = 4; k = 3
Gs = p − c
LV:
Gb = v − p
Spot market transaction (SMT)
G (c) = p(c) − c
s
G b (c) = v − p(c)
Gs(c1) = 7 - 2 = 5
Gs(c2) = 7 - 4 = 3
Risk
Gb(c1) = 9 – 7 = 2
Gb(c2) = 9 – 7 = 2
secure
SMT: p(c1) = 3 + 2 = 5
p(c2) = 3 + 4 = 7
Assumptions :
c stochastic
Δp = Δc = 2
secure
v = v  constant, fixed valuation
Gs(c1) = (3 + 2) – 2 = 3
Gs(c2) = (3 + 4) – 4 = 3
p = p  Fixed price in longterm contract
p(c) = k + c( x ) Spot market price
Gb(c1) = 9 – (3 + 2) = 4
Gb(c2) = 9 – (3 + 4) = 2
Risk
Risk is
transfered from
the buyer to the
seller due to LV.
The buyer
secures himself
against risk.
Seite 59
Longterm contracts
 Examples for Spot market transactions
Price history for the last 90 days fo r Lego 8421 Pneumatik Kranwagen
Price history for the last 90 days for
Samsung PS -42P4A
Seite 60
Longterm contracts
 Examples for Spot market transactions
Hewlett -Packard HP iPAQ hw6515
Fujitsu -Siemens Pocket Loox N500
Preisentwicklung der letzten 90 Tage für:
Acer Computer Aspire 1654WLMi
Preisentwicklung der letzten 90 Tage für:
Sony Vaio VGN-FS315S
Seite 61
Longterm contracts
 Example for longterm contracts: Kerosene supply contracts
RJETARA5
(gallons) Rotterdam
(ARA) Kerosene-Type
Jet Fuel Jet
SpotFuel
Price FOB
RJETARA5
(tons) Rotterdam
(ARA) Kerosene-Type
06.1986
-12.
2005
(Cents
per
Gallon)
Spot Price FOB (US$per ton) 01.2003 - 12.2005
800
800
700
700
600
600
500
500
400
400
300
300
200
200
100
100
Spotmarkettransactionen
Fixed price contract
with price adjustment
Fixed price contract
Jun.05
Jun.04
2.11.05
Jun.03
2.9.05
Jun.02
Jun.01
2.7.05
Jun.00
2.5.05
2.11.04
Jun.98
2.1.05
Jun.99
2.3.05
2.9.04
Jun.97
2.7.04
Jun.96
2.5.04
Jun.95
Jun.94
2.3.04
Jun.93
2.1.04
2.9.03
Jun.92
2.11.03
2.7.03
Jun.91
2.5.03
Jun.90
2.3.03
Jun.89
Jun.87
Jun.86
Jun.88
2.1.03
0
0
RJETARA5
(gallons)(tons)
Rotterdam
(ARA)(ARA)
Kerosene-Type
Jet Fuel
Spot
Price
FOB
(Cents
per Gallon)
RJETARA5
Rotterdam
Kerosene-Type
Jet Fuel
Spot
Price
FOB
(US$per
ton)
Seite 62
Longterm contracts
 Austrian Airlines Group
 The share of fuel on the total costs of an airline is average about 15% (Austrian: 15,5%).
 If the fuel costs are not secured by longterm supply contracts or hedghing, rising fuel costs can
aggravate the result significantly.
AUA schockt mit Gewinnwarnung, (Die Presse) 28.04.2005
Rote Zahlen. Im 1. Quartal 2005 wurde ein höherer Verlust als
erwartet eingeflogen. Auch für das Gesamtjahr droht ein saftiges
Minus, sollte Kerosin teuer bleiben.
[…] Kritik wird vor allem daran geübt, dass die hohen
Kerosinpreise nicht durch entsprechende Termingeschäfte
(Hedging) abgesichert wurden. Die AUA hat im ersten Halbjahr 2005
nur drei Prozent ihres Treibstoffbedarfs am Terminmarkt
abgesichert. Ein höherer Heding-Anteil hätte zwar auch Kosten
verursacht, aber die starke Ergebnisverschlechterung verhindern
können, wird argumentiert.
Quelle: Austrian Halbjahresergebnis 2005,
http://www.austrianairlines.co.at/deu/Investor/presentation/
[…]Derzeit liegt der Preis bei 570 Dollar, AUA-Finanzvorstand
Thomas Kleibl hat aber lediglich 450 Dollar budgetiert. Zum
Vergleich: 2004 lag der Kerosinpreis im Schnitt bei nur 240 Dollar
je Tonne. […]
Seite 63
Longterm contracts
 Lufthansa Group
Fuel costs are expected to increase by another billion EUR in
2006.
Die Treibstoffkosten sind im laufenden Jahr bereits deutlich
gestiegen und werden weiter kräftig zulegen: In den ersten neun
Monaten seien die Kosten für Kerosin um 42,6% oder 550 Mio.
EUR auf 1,8 Mrd. EUR gesprungen, sagte Finanzvorstand Kley.
Davon seien rund 60% durch Treibstoffzuschläge an die Kunden
weitergegeben worden. Ohne Preissicherung wären die Kosten
noch 221 Mio EUR höher ausgefallen, sagte Kley weiter.
Source: Lufthanse Konzern Eckdaten 2005
http://konzern.lufthansa.com/de/downloads/presse/downloads/reden/
lh_kley_bpk2005.pdf
Allerdings könne das Hedging nur die Volatilität begrenzen
und den Anstieg der Kosten verlangsamen, bei anhaltend
hohem Preisniveau werde der positive Effekt aus den
Sicherungsmaßnahmen mittelfristig auslaufen. Kley rechne im
laufenden Jahr mit 2,5 Mrd EUR und 2006 mit 3,2 Mrd bis 3,5 Mrd
EUR Aufwand für Treibstoff. 77% des im kommenden Jahr zu
erwartenden Kerosinbedarfs seien mittels Hedging im Preis
gesichert.
Quellen:
http://www.handelsblatt.com und http://www.finanznachrichten.de
Seite 64
Longterm contracts
and Alternatives for insurance against risks
 Swaps or contract for differences
eliminate price risks like a fixed price contract, but they are mostly pure
financial contracts, with one party (e.g. a bank like Hypo Alpe-Adria in
exchange rates) winning from deviations of the contract price.
 Options
 Futures
 Question (master thesis?): Did the increase in financial instruments
reduce long term contracting?
Seite 65
Longterm contracts
 Summary
 Spot price contracts
 buyer: hedging against demand risks
 seller: hedging against cost risks
 Fixed price contracts
 buyer: hedging against cost risk on the supply side
 seller: hedging against demand risks
 Choice of contract depends on the degree of risk aversion, on the correlation between
production costs & the shift of the market supply curve and between changes of the
individual assessment & shift of the market demand curve as well as on the
steepness of the supply- and demand curves.
Seite 66
Longterm contracts
 Summarizing hypotheses:
 Fixed price contracts are preferred if
(i) valuation risks (demand shocks) affect risk avers sellers (spot price is
volatile), or
(ii) high cost risks (supply shocks) faced by risk avers buyers.
 Spot market transactions (flexible pricing) are preferred,
(i) if cost risks (supply shocks) are dominant for risk avers sellers, or
(ii) valuation risks (demand shocks) are dominant for risk avers buyers.
Seite 67
Longterm contracts
Advantages over Spot market transactions
Spotmarkettransactions:
 Hedging of transactionspecific investments
 Risk hedging
Seite 68
Longterm contracts
Transaction cost saving and Screening
 As an alternative to short term contracts long term contracts can reduce
transaction costs (search-, initiation-, contract-, enforcement costs).
 Hold-up Problems can be reduced (at least) partially.
 Screening
 Parter selection is particularly important for longterm contracts due to
stronger ties and difficulties in cancelling or terminating such a contract.
 The cooperation and choice of good partners can be encouraged through
specifally designed incentives.
Seite 69
Longterm contracts
Advantages over vertical integration
 Possible advantages of longterm contracts compared to vertical
integration:




Less hierarchy
Independence of companies
Outsourcing
Externalization of claims – illegitimate
Seite 70
Long term contracts
 Less hierarchy
 Increasing vertical integration is connected to increasing costs.
 Advantages of division of labour can disappear.
 Rising costs of control, losses in efficiency since integration harm internal
incentives, e.g., losses by a division are easier to hide the larger the company.
Seite 71
Longterm contracts
 Independence of companies
 Companies in a contractual relation are not exclusively bounded to each
other but also can achieve commercial stocks with other companies.
 Outsourcing
 Special services (accounting, etc.) can be outsourced to specialists to save
costs.
Problem: if different services are provided by one company (e.g. consulting
and company auditing of Anderson Consulting in case of Enron).
 Remark: Recent trend of of reshoring (Economist, January 19th, 2013)
Seite 72
Longterm contracts
 Externalizing damage - Illegitimate
 Externalizing damage means that a risky divison of a company will be
outsourced to an independent company to minimize the risk for the
outsourcing company. The cooperation of these 2 companies is insured by
longterm contracts.
 Example transportation:
A company can outsource the tranportation of dangerous goods (e.g. oil
tanker) to a company with ist own low equity.
Thereby the settlement can be reduced in case of a damage event,
because the outsourced company with its (low) equity and not the
outsourcing company has to assume the liability.
Seite 73
Contracts between rigidity and flexibility
 Adjustment elements can be
 taken ex-ante into the contract and that in the dimensions
-
price
quantity

-
ex-post:
Consideration of special circumstances
Delegation of decission rights
renegotiation
Seite 74
price-related contract price
 Spot price clause
Uranium, copper, oil and refined products, natural gas
 Price indices
of inputs like salary, energy,
appliance on e.g. rents, RPI – X in regulation
Pros & cons
+ Avoidance that the contract price differs too much from the shortage prices
+ Risk sharing
- Often difficult to find a market price as a reference.
- For transaction specific investments there are either no spot markets or (spot)
markets with few participants.
Seite 75
price related contract price – most favored clause
 The seller commits to charge the buyer the lowest price. Or the buyer commits to pay the
highest price he pays to other sellers.
 Most favored clauses connect the contract price to the current prices always negotiated with
new contract partners. Thereby new and current market conditions can be taken into account,
when spot markets do not exist. The most favoured clause allows the contract partner to profit
from new information arising from new contracts even within their old contracts; moreover
cheap implementation it offers a ree ride for the (old) buyer.
 Pros & Cons
+ supply monopoly: protection of the buyer who has taken specific investments against
exploitation by the monopoly, because a new contract of the supply monopoly with a new buyer
reflects the current scarcity.
+ Monopsony (of the buyer): protection of the seller, who has taken specific investments, against
exploitation by the monopsony of the buyer, because the highest price the buyer is ready to pay
is a good scarcity indicator.
- Stabilization of a cartel, because every price cut has to be extended to all most favoured.
- Because of above, any discount to an individual party becomes costly making price cuts/hikes
less likely.
Seite 76
price related contract price – cost dependent prices
 In many longterm contracts – e.g. development of weapon systems, satellites, large
buildings, ready-to-use industry facilities – the seller has just a vague idea about the
emerging costs. In such cases the contract partys can agree on cost-plus contracts.
The seller gets refunded the costs and more over he obtains a profit margin.
 The disadvantage is, that there is no incentive to reduce the costs. Pemiums based on a
percentage of costs (e.g., architects) there is even the incentive to increase costs.
 This can be avoided by fixed prices. But they face incentive problems themselves:
- retention of information about the costs
- deterioration of quality
 Flexibility and rigidity of different contracts
complete rigidity
fixed price
cost element clauses
cost based with price ceiling
fixed cost target
Successively adjusted cost target
complete flexibility
cost based price
Seite 77
price related contract price – success oriented prices
 The price the buyer pays for the service of the seller is connected
to buyer‘s profit using the seller‘s input
 Example agriculture: rent versus crop sharing contracts
+ improved risk sharing compared to fixed price of a lease
+ Reduction of moral hazard (if of sufficient duration)
 Possibility for areas not exlusively cultivated by the owner:
1. Farm worker for salary. The farmer bears the whole risk.
2. Rent. Renter bears the whole risk.
3. Contingent rent or crop sharing contracts.
 The obvious advantages of 3. faces some disadvantages:
- Transaction costs: more complex contracts
- Risk sharing is also possible by combining a fixed rent and a wage.
 Netback pricing (for crude oil)
Seite 78
price related contract price– success oriented prices
 That´s why diversification alone is not a satisfactory explanation for the
existence of different contracts. Additional reasons for crop sharing
contracts (low powered incentives) are:
1. The landowner has an incentive to offer advice.
2. Less incentive for over-exploitation compared with a fixed rent.
3. Less incentives to aquire expensive information (example: wood
sharing).
 On the contrary, given high efforts of the renter (e.g. tabacco in India,
but hardly with rice) these farmers choose a fixed price contract with
the landowners, to keep the residual profit in contrast to only parts
under crop sharing contracts (high powered incentive).
 Success oriented prices are used at Franchising, to reduce these
incentive problems.
 Why are Billa-stores owned, but McDonalds franchised?
Seite 79
quantity adjustments
 In many longterm contracts there is an ex ante agreement about the
flexibility of the quantity supplied. Quantity adjustments of the buyer
should help to react to changes in demand. This makes sense for
specific services, because it avoids that the buyer has an incentive to
to choose the sanction-free quantity strategically. A further advantage
is that price adjustments necessarly result in a zero sum game, the
profit of one of them is the loss of the other one, which is not the case
with quantity adjustments that faciliate thus the search for a
cooperative solution.
 Example: The buyer is entitled to vary his orders up to e.g. +-10%.
E.g., the German car industry typically insures their suppliers to deliver
a certain percentage of the total.
Seite 80
quantity adjustments and Take-or-Pay contracts
 The buyer (a refinery, a pipeline, a utility company) committs to pay a
minimum percentage of the contractual agreed quantity, even if it cannot
use the contracted volume at the moment. The payment for an additional
unit associated with this contract are shown below; the additional shown
marginal production costs serve for the following discussion.
 Explanations and reasons for such contracts.
1. Risk allocation: due to the minimum guaranteed purchase the financial
risk of the producer is partially transfered to the buyer.
2. Approximation of the marginal cost curve especially in case of natural
gas.
3. Less risk that the buyer tries lower the price by delaying the request for
discharges.
4. Adjustment to changed market conditions.
5. Simplicity.
Seite 81
quantity adjustments and Take-or-Pay clauses
Diagram of a Take-or-Pay contract (usual for natural gas contracts & duration: 20a)
as approximation to the marginal costs
€
Marginal costs for supply without ToP clause
qmin
qmax
quantity (q)
Seite 82
force majeure clauses
 Force majeure clauses exempt the seller from the obligation to supply in case
certain incidents occur, or extend the due date.
 Because these clauses transfer the risk to the buyer, there is the question,
under which terms this clause is economic.
 Assume a (random) elementary incident that raises the production costs from:
c → c’, c’ >> c
so, that the incentive for the contracted delivery gets negative,
c’ > p.
 Nevertheless, a breach of contract should protect the positive contract interest
of the buyer (v – p).
 Such a compensation rule has indeed several advantages:
+ The seller breaches the contract only if this is efficient:
c’ > v
+ Offers incentives for precautionary measures.
Seite 83
force majeure clause
 Nevertheless this compensation rule can have undesired consequences:
1. The seller bears the whole risk, because the buyer either gets the service or a
complete compensation for the contract interest. If the seller is more risk averse than
the buyer, an inefficient allocation of risk results (the risk averse seller has to hedge
the risk neutral buyer). This situation can be improved by granting the seller the right
of withdrawal, if the contract fulfillment is not efficient anymore, i.e., if
c’ > v.
In this case the seller faces no loss but looses his quasi rent compared to the case
of delivery without the elementary incident. The buyer bears the risk, that his positive
contract interest is not realised anymore. So the expected value of a contract with
the right of withdrawal is lower for the buyer, but higher for a risk averse seller.
Therefore, it is possible to improve the situation of both by agreeing on a discount of
the contract price for this right of withdrawal.
2. It is often difficult to quantify the positive interest of the buyer and even more difficult
for third partys. These difficulties of determining real damages is valid for many other
cases, especially for environmental problems, because the buyer has the possibility
to change to substitutes. This leads often to ex-post conflicts.
Seite 84
force majeure clause
 The following factors justify an ex-ante right of withdrawal from the
contract by the seller:
1. The seller is more risk averse than the buyer.
2. Possibilities of limiting cost for the seller are more or less impossible.
3. The buyer has a greater possibility to reduce the damage ex-post
(e.g., by drawing on substitutes).
Seite 85
Expost adjustments through delegation and renegotiation
 The previously discussed extensions try to introduce ex-ante a certain
flexibility to the contract.
 But this also happens ex-post after monitoring the circumstances.
The following variants are observable:
1. Delegation of decision rights to one contract party
2. Delegation of decision rights to a third party (courts, arbitration)
3. Renegotiation.
Seite 86
Expost delegation of decision rights to a contract party
 There are:
1. Price changing provisos by the seller.
2. Termination rights for the buyer in case of price increases
(e.g. insurances)
 Such clauses make economic sense, if the total expected costs are
lower due to price changing provisos than the next best alternative. At
competitive markets with price lists for competitive goods the buyers
can accept that.
Less efficient if:
1. Reliable shortage indicators exist (spot markets)
2. Little competition so that listed prices do not reflect the shortage.
Seite 87
Expost delegation of decision rights to a contract party
 Quantity options, so one party (buyer or seller) gets the right to
determine the quantity at the delivery time.
 Example:
1. Call for deliveries - car producers ask suppliers for the # of
components.
2. Petroleum coke – The seller determines the quantity the buyer has to
take.
 Such contracts are made, if
1. It is difficult to determine the quantity ex ante
2. Misuse on the part of the owner of the right of quantity option is small.
 Quantity options allow the benefiting party to adjust the quantities the
current situation without expensive renegotiations.
Seite 88
Expost: Delegation of decision rights to a third party
 Due to the fact that courts are often inappropriate to take a quick and
cheap decision, one may specify that “referees/mediators/arbitrators”
will settle all future contested decisions.
 The use of this strategy is increasing, especially in international
contracts.
Seite 89
Expost: renegotiations
 To justify longterm contracts, the contract may not be terminated by
one party at any time and without giving reasons, to enforce
renegotiations. That´s why such renegotiations are connected to
certain clauses.
 Typical renegotiation clauses are similar to force majeur clauses. The
difference is that the latter intend to interrupt the delivery, whereas
here a delivery may happen, even under changed circumstances.
Renegotiation clauses may be
1. Very general
2. Rather non-binding
3. Or specifies deadlines or thresholds.
Seite 90
Expost: renegotiations
 A typical example are the renegotiation-clauses at longterm buildingand facility projects. At these projects, where each of them is unique,
there exists a high dependency between the contract partners.
 Crocker-Masten (1991): renegotiation clauses over adjustments of
contract prices are promoted in the following cases:
The more difficult it is to identify the future circumstances,
the more difficult adjustment formulas are, or their
enforcement over third partys ,
with the term of the contract
given fixed supply, price formulas may be inadequate to cover all
kinds of changes.
 This is confirmed by an analysis of 234 American gas-suppliers
Seite 91
Private mechanisms to enforce longterm contracts
 If contracts can not be implemented or only partially through courts,
then the contract partys have to look for alternatives ex-ante, so that
the self-interest of fulfilling the contract remains.
This can be realized due to several alternatives:
1.
2.
3.
4.
Self-enforcing contracts
Reputation
Deposit
Contract penalties
Seite 92
Private mechanisms to enforce longterm contracts –
self enforcing contracts
 Even in case of full absence of governmental authorities, the parties
may have an interest to fulfill a contract if they are interested in future
transactions with the contract partner.
 Example & approach: Repeated games
K = buyer,
Strategies
V = seller
L = supply
NL = not supply
Z = pay
NZ = not pay
Normal form – Prisoner´s dilemma
Difference: ∞-often repeated, NPV.
Seite 93
Private mechanisms to enforce longterm contracts–
Reputation
 Each contract party, which has to decide whether it is worth to breach
enforcable contract components – e.g. by delivery of bad quality goods
– or not, has to consider that this behaviour gets around to other
members of the market and so the chances for future contracts are
affected.
 The seller has the possibility to produce a good with low (l) and high
(h) quality at the costs
cl < ch
 The buyer does not have the possibility to check the quality before
signing the contract (e.g. a car purchase). The buyer keeps the
relationship alive as long he gets high quality. Detection of a delivery
with low quality leads to an end of the business relation.
Seite 94
Private mechanisms to enforce longterm contracts–
Reputation
Assumptions:
(i)
supply leads to a sales quantity q.
(ii) Open contract end occuring with a probability y.
(iii) Breaches of the contract are known to all market members
(iv) Breaching leads to immediate termination of the contract (grim strategies).
Net present value (per unit) from fulfilling the contract = supply of high quality:
Vs =
∞
∑ (1 + r )
τ =t +1
t −τ
τ −t
1− y 
(1 − y )τ −t ( p − ch ) = ∑ 

1
r
+

τ =t +1
∞
( p − ch ) = 1 − y ( p − ch )
r+y
An opportunistic seller has an additional profit from low quality supply
q(ch – cl) at time t .
Fulfillment of the contract demands for this seller, that
1− y 
q(ch − cl ) ≤ 
( p − ch )q
r+ y
Seite 95
hostages
 The threat of contract termination or reputation effects are sometimes
not sufficient to ensure fulfillment. This raises the question how the
breach of an agreement can be made more expensive.
 This can be done by deposing a hostage (from both partys).
 Example: a pawnbroker gives loan for deposing a valuable good. In
case of real estates, the house serves as collateral for the mortgage.
Seite 96
Private mechanisms to enforce longterm contracts hostages
 2 period model (investment t = 0, delivery t = 1), risk neutral, perfect
competition between the sellers about this contract:
 Seller: specific investment k, production costs c.
 Buyer, value (v) is a random variable:
vH > c + k with probability 1 - π
v=
vL < c + k with probability π.
 Buyer deposits a hostage with the value h (for the buyer) and
the value αh, α < 1, for the seller.
Seite 97
hostages

1.
2.


1.
2.

t = 1, the buyer has the following possibilities:
Fulfill the contract, reclaim the hostage, Gb = v – pv.
Breaching of the contract and looses the hostage, Gb = –h.
So the contract will be fulfilled for v > pv – h.
The seller has 2 possibilities:
vL so low, that the buyer breaches the contract, Gs = αh – k.
vH > pv – h never, so Gs = pv – c – k supplies.
The first case (vL low) leads to the fact, that the contract will be
breached with the probability of π => expected profit of the selller is
EGs = (pv – c – k)(1 - π) + π(αh – k)
EGs = 0 (by ex ante competition) => pv = c +
k − παh
1−π
Seite 98
Private mechanisms to enforce longterm contracts hostages
 Considering the special case first α = 1, d.h., both value the hostage
equally (e.g. money), then
h = k.
This level is efficient, because it forces (i.e., protects) the seller to
invest k.
 The buyer will agree, if his expected profit will not be negative, so
(vH – c – k)(1 - π) + π(–k) ≥ 0 ↔ (vH – c)(1 - π) ≥ k. .
Seite 99
Private mechanisms to enforce longterm contracts
hostages
 The hostage remains ideal, if the seller can choose between an
efficient specific and an inefficient unspecific.
 It insures the seller against a Hold-Up (refuse of contract fulfillment to
reduce the price c + k > p > c) from buyer-side.
 But: The seller is now indifferent between supply/non-supply! So there
results another hold-up problem: the seller can refuse to supply and
return the securities to get higher supply price c + k < p < v.
 Possible solution: choose a hostage with a high value for the buyer
and a low value for the seller, α = 0.
 But now the seller can be held ransom. This can can be avoided if the
seller can destroy the deposit (hostage).
Seite 100
Longterm contracts - examples
 Gas market (long running time, 20a, ToP).
 Airbus: altogether more than 5400 companies supply single
components ans whole devices.
 Grüner Punkt
 Regulation (RPI-X, 5a runtime in UK)
 Railway
 Electricity market
 Car industry
BMW, Nissan
Seite 101
penalties
 Contract penalties are another possibility to sanction a breach of a
contract. The following problems may occur:
1. This requires that the contract breach can be sued and that courts can
enforce the contract.
2. In case of contract penalties as compensation this can induce a party
to provoke contract breach.
3. The payment of the penalty to a third party avoids the strategy in 2, but
generates a Hold-Up problem. One party can threat to the other one to
cause a high and not compensated damage, if the contract terms not
get changed ex-post.
Seite 102
Additional literature
 Eger, T., Eine ökonomische Analyse von Langzeitverträgen,
Metropolis, 1995.
 Hart, O., Firms, Contracts and Financial Structure, Cleardon, 1995.
 Masten, S., Case Studies in Contracting and Oragnization, Oxford
University Press, 1996.
 Wirl, F., Industriebetriebslehre, Skriptum, 2013.
Seite 103

Long term contracts

Transcription

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