Supply contracting under dynamic asymmetric cost information

Luca Di Corato and Michele Moretto

No 340040, FEEM Working Papers from Fondazione Eni Enrico Mattei (FEEM)

Abstract: We consider a long-term contractual relationship in which a buyer procures a fixed quantity of a product from a supplier and then sells it on the market. The production cost is private information and evolves randomly over time. The solution to this dynamic principal-agent problem involves a periodic two-part payment. The fixed part of the payment depends on the initial supplier’s cost type while the other is contingent on the current cost type. A notable feature is that, by using the information about the initial cost type, the buyer can reduce the burden of information rents paid for the revelation of the future cost type. We show that the distortion, resulting from information asymmetry, remains constant over time and decreases with the initial type. Lastly, we show that our analysis immediately applies also when input prices are private information and evolve randomly over time.

Keywords: Demand and Price Analysis; Industrial Organization; Productivity Analysis (search for similar items in EconPapers)
Pages: 35
Date: 2024-02-23
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-reg
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https://ageconsearch.umn.edu/record/340040/files/NDL2024-04.pdf (application/pdf)

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Working Paper: Supply contracting under dynamic asymmetric cost information (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemwp:340040

DOI: 10.22004/ag.econ.340040

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