Contract efficiency in the presence of demand and cost uncertainty

Melbourne Institute Working Paper No. 01/05

Date: January 2005


Paul H. Jensen
Robin E. Stonecash


In this article, we examine contract efficiency in a complex contractual environment for services characterized by cost uncertainty and an unknown level of service provision. Using data on water and sewerage network maintenance services contracts from two Melbourne water retailers, we compare the expenditure across fixed-price and cost-plus service contracts. The results suggest that the fixed-price contracts outperform the cost-plus contracts, thereby confirming the standard result that efficient contracts trade-off risk for incentives.

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