Contracting in an Idiosyncratic Market

Bell Journal of Economics, 1983, vol. 14, issue 2, pages 338-350

Abstract: This article analyzes contracting in a market for idiosyncratic products in which customers and suppliers are asymmetrically informed about randomly fluctuating demand conditions. The contracting problem is to induce agents to reveal truthfully their private information about demand, while also inducing suppliers to allocate scarce capital efficiently. Efficient incentive-compatible contracts are characterized and are interpreted in terms of an implicit market for capital. The contracts can be implemented by a price mechanism whereby suppliers establish a payment schedule from some restricted class, and customers, taking the announced payment schedule as given, place an order.

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