Contract Complexity and Performance

Abstract

This tutorial discusses theoretical and behavioral aspects of contract design with an emphasis on complexity as a design factor. We first introduce optimal contracts under different complete and asymmetric information settings. We then demonstrate how simple quantity discount contracts can effectively eliminate inefficiencies under some conditions. We present behavioral aspects of contract design and discuss trade-offs between contract design and contract performance. Finally, we introduce the concept of dynamic procurement as a means to implement nonlinear pricing schemes, and we establish a link between dynamic procurement and quantity discounts.