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Delegation in Vertical Relationships: The Role of Reciprocity

Author

Listed:
  • Castellani Marco

    (Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Udine, Udine, Italy)

Abstract

We analyze the decision of a firm to produce an input internally or to delegate the production to a better-informed supplier. The supplier can produce inputs of different qualities. As quality is not verifiable, a selfish supplier always produces the quality that minimizes his costs. A supplier that is motivated by reciprocity may instead produce the quality that maximizes the revenues of the buyer. Accordingly, reciprocity could increase the use of the market. To trigger reciprocal behavior the buyer must propose a contract that the seller perceives to be kind. We find that for reciprocal behavior to show up, it is enough that the supplier is moderately reciprocal. Lastly, we provide some intuitions about how our results change if the supplier is liquidity-constrained and must be granted non-negative profits in all circumstances.

Suggested Citation

  • Castellani Marco, 2023. "Delegation in Vertical Relationships: The Role of Reciprocity," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 23(1), pages 443-468, January.
    • Handle: RePEc:bpj:bejtec:v:23:y:2023:i:1:p:443-468:n:9
    DOI: 10.1515/bejte-2020-0197
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    More about this item

    Keywords

    reciprocity; market exchange; delegation; vertical integration; liquidity constraints;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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