OBJECTIVE: Price-volume contracts between public payers and drug manufacturers are seen as one way of controlling drug expenditures. However, the manufacturer may have more information than the payer regarding the eventual market size. Thus, price volume agreements may not entirely reduce the financial risks faced by a payer. METHODS: We developed a mathematical model of the contract design problem. We modeled the contract design process from the perspectives of both the payer and the manufacturer. We assumed a sequence of events as follows: the payer determines a rebate schedule; then the manufacturer submits sales forecasts as part of a formulary submission; then the payer either accepts or rejects the submission; and finally the manufacturer determines the appropriate level of marketing effort. We applied game theoretic tools to identify an optimal contract from the perspective of the payer. The sequence of events was resolved through Stackleberg equilibrium methods.RESULTS: An optimal contract exists for both the payer and the manufacturer. The manufacturer's marketing effort is positively related with anticipated demand. Although the manufacturer may have private information about market size and future marketing effort, the payer can design the contract so that it is in the manufacturer's best interest to reveal any private information.CONCLUSIONS: In an optimal contract the payer can infer any private information held by the manufacturer regarding anticipated market size or marketing effort. Thus, a payer can eliminate uncertainty regarding market size through a carefully designed contract. In this way, a carefully designed price-volume agreement can be used to reduce a payer's risk.