Vertical control, opportunism, and risk sharing

Teis Lunde Lømo

Economics Letters, 2020, vol. 191, issue C

Abstract: A manufacturer who offers secret contracts faces an opportunism problem: She undercuts her own input prices and fails to offset retail competition. I show that this problem diminishes when retailers are risk averse and face demand uncertainty. Risk aversion and uncertainty create a bilateral risk sharing incentive that raises equilibrium input prices above marginal cost. The manufacturer can therefore profit from downstream risk aversion when retail competition is fierce.

Keywords: Vertical relations; Secret contracting; Risk aversion (search for similar items in EconPapers)
JEL-codes: L11 L14 L42 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:191:y:2020:i:c:s0165176520300987

DOI: 10.1016/j.econlet.2020.109114

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