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The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment

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Author Info
Salvatore Piccolo () (University of Salerno and CSEF)
David Martimort (University of Toulouse I, IDEI)

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Abstract

We provide a rationale for contractual incompleteness in a setting with manufacturer-retailer hier- archies. In a class of simple manufacturers-retailers economies, characterized by adverse selection and moral hazard, we show that principals dealing with (exclusive) agents who compete on a downstream market, may prefer to leave contracts silent on some (potentially) veri.able performance measures whenever certain other aspects of agents.activity remain noncontractible. Two e¤ects are at play once one moves from a complete to an incomplete contracting. First, reducing the number of screening instruments has a detrimental e¤ect on principals. pro.ts as it makes information revelation more costly and drives up the information rents associated to informational asymmetry. Second, it may provide principals with strategic power in that it allows to force competing hierarchies to behave in a more friendly manner on the downstream market. In contrast with previous literature, conjecturing a positive relationship between transaction costs and contracting incompleteness, it is demonstrated that equilibrium contracts display forms of incompleteness whenever agency costs are small enough. Implications on the use of vertical arrangements based on resale price maintenance in imperfectly competitive industries are also discussed.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy in its series CSEF Working Papers with number 160.

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Date of creation: 01 Jul 2006
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Handle: RePEc:sef:csefwp:160

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  4. Salvatore Piccolo & David Martimort, 2003. "Resale Price Maintenance under Asymmetric Information," CSEF Working Papers 107, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy, revised 01 Jun 2005. [Downloadable!]
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  5. Hart, Oliver & Moore, John, 1999. "Foundations of Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 115-38, January. [Downloadable!] (restricted)
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  6. Andrea Shepard, 1993. "Contractual Form, Retail Price, and Asset Characteristics in Gasoline Retailing," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 58-77, Spring. [Downloadable!] (restricted)
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  15. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 83-114, January. [Downloadable!] (restricted)
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  19. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May. [Downloadable!] (restricted)
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  21. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring. [Downloadable!] (restricted)
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  28. MARTIMORT, David, 1994. "Exclusive Dealing, Common Agency and Multiprincipals Incentive Theory," IDEI Working Papers 43, Institut d'Économie Industrielle (IDEI), Toulouse, revised 1996.
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