How (Not) to Purchase Novel Goods and Services: Specific Performance Versus At-Will Contracts

Pricing Novel Goods

“…One way to interpret our main findings is that in such situations, it may be in the principal's interest to voluntarily choose a limited commitment contract (by not committing to a future price) as a way to overcome her incentive problem. 6 Perhaps the closest paper to ours in terms of application is Schmitz (2022), which studies a similar bilateral trade problem, where a buyer wants to procure a novel object, but the seller's costs are only revealed with delay. He shows that an at-will contract, which allows the seller to walk away if the costs turn out to be too high, may generate more social surplus than a specific-performance contract, which requires the seller to deliver an object no matter the costs.…”