A note on fixed and flexible-term contracts

Engel et al. (1997 2001 2007) have proposed flexible-term contracts as a solution to suboptimal renegotiation of public-private partnerships. We show that whenever the uncertainty lasts over more than two periods, flexible-term contracts have a drawback. The expected duration of a flexible-term contract can be higher than the (certain) duration of a fixed-term contract, the difference being directly proportional to the volatility of the project.