 Producer-Supplier Contracts with Incomplete InformationWei Shi Lim ()
Management Science, 2001, vol. 47, issue 5, 709-715 Abstract: This paper investigates the contract design problem of a producer when he purchases parts from a supplier, and there is incomplete information regarding the quality of the parts. This is the first game-theoretic model of quality control that captures this informational asymmetry. We focus on two compensation schemes embedded in the contract, namely, price rebate (when inspection is done upon receipt of the parts) and warranty. We show that when a full-price rebate is not possible and the producer and the supplier have to share the damage costs, an optimal contract is such that the supplier compensates the producer by the same amount, regardless of his quality type. However, a supplier with low quality is more likely to be offered a contract with an inspection scheme, while a supplier with high quality is constrained with a warranty scheme. We also show that when the producer need not share the cost in exactly one of the compensation schemes, he may still offer the other compensation scheme to a supplier type depending on the relative costs involved, the maximum compensation cost acceptable by all supplier types, and his ex ante beliefs about the quality level of the supplier. Keywords: Contract Design; Quality Control; Game Theory; Incomplete Information (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:47:y:2001:i:5:p:709-715 Access Statistics for this article More articles in Management Science from INFORMS Contact information at EDIRC. |
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