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Choices of common contract structures in markets characterized by demand uncertainty and high fixed costs are examined in this paper through the formulation and analysis of a static single-product model of two-party ventures undertaken by utility of profit maximizers holding generalized probabilistic beliefs. It is shown that the parties' broad attitudes towards risk, the parties' possible differences in probabilistic beliefs, and the likely transaction costs Involved in making contracts, often decisively Influence the choice of contract structure. It is also argued that the best public policy towards joint ventures in the markets of Interest is a policy that encourages the operation of a free market; for there are no "optimal" contractual interactions, and the various probabilistic and value differences surrounding the provision of products are therefore most effectively resolved in the marketplace.
Systems, Man and Cybernetics, IEEE Transactions on (Volume:10 , Issue: 9 )
Date of Publication: Sept. 1980