Risk sharing mitigates opportunism in vertical contracting

Teis Lunde Lømo ()
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Teis Lunde Lømo: Department of Economics, University of Bergen, Postal: Post Box 7800, 5020 Bergen, Norway, https://sites.google.com/site/teislundeloemo/

No 10/15, Working Papers in Economics from University of Bergen, Department of Economics

Abstract: I study one manufacturer that contracts secretly with two risk averse retailers that face uncertain demand. The need for risk sharing limits the manufacturer’s scope for opportunistic deviations. If retail competition is fierce, the manufacturer’s profit increases with the levels of risk aversion and uncertainty, i.e., there is no trade-off between risk sharing and industry efficiency. The results are consistent with stylized facts from empirical and experimental research on vertical relations, including the negative correlation between vertical integration and uncertainty.

Keywords: Vertically related markets; contracting externalities; imperfect information; risk sharing (search for similar items in EconPapers)
JEL-codes: D81 L14 L42 L60 L81 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-12-21
New Economics Papers: this item is included in nep-com and nep-cta
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