Resource title

Contract adjustment under uncertainty

Resource image

image for OpenScout resource :: Contract adjustment under uncertainty

Resource description

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.

Resource author

Helge Holden, Lars Holden, Steinar Holden

Resource publisher

Resource publish date

Resource language

eng

Resource content type

text/html

Resource resource URL

http://hdl.handle.net/10419/18836

Resource license

Adapt according to the presented license agreement and reference the original author.