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Vertical Contracting with Informational Opportunism

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  • Vianney Dequiedt
  • David Martimort

Abstract

We consider vertical contracting arrangements between a manufacturer and a retailing network when retailers have private information and the organization is run through bilateral contracts. We highlight a new form of informational opportunism arising when the manufacturer manipulates information learned separately in each relationship. We characterize the set of allocations robust to such opportunism by means of simple ex post incentive compatibility constraints. Those constraints limit the manufacturer's ability to use yardstick competition among retailers. They simplify contracts and restore a rent/efficiency trade-off even with correlated information. We show that sell-out contracts are optimal under a wide range of circumstances. (JEL D21, D86, L14, L60, L81)

Suggested Citation

  • Vianney Dequiedt & David Martimort, 2015. "Vertical Contracting with Informational Opportunism," American Economic Review, American Economic Association, vol. 105(7), pages 2141-2182, July.
  • Handle: RePEc:aea:aecrev:v:105:y:2015:i:7:p:2141-82
    Note: DOI: 10.1257/aer.20121640
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    2. Pagnozzi, Marco & Piccolo, Salvatore & Reisinger, Markus, 2021. "Vertical contracting with endogenous market structure," Journal of Economic Theory, Elsevier, vol. 196(C).
    3. Markus Möller, 2024. "Transparent Matching Mechanisms," ECONtribute Discussion Papers Series 306, University of Bonn and University of Cologne, Germany.
    4. Johannes Münster & Markus Reisinger, 2021. "Sequencing Bilateral Negotiations with Externalities," ECONtribute Discussion Papers Series 096, University of Bonn and University of Cologne, Germany.
    5. W. Bentley MacLeod & Teck Yong Tan, 2016. "Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile," NBER Working Papers 22156, National Bureau of Economic Research, Inc.
    6. Balzer, Benjamin & Schneider, Johannes, 2021. "Persuading to participate: Coordination on a standard," International Journal of Industrial Organization, Elsevier, vol. 78(C).
    7. Yu Chen, 2017. "On the Equivalence of Bilateral and Collective Mechanism Design," Graz Economics Papers 2017-01, University of Graz, Department of Economics.
    8. Benjamin Balzer & Johannes Schneider, 2022. "Mechanism Design with Informational Punishment," Papers 2201.01149, arXiv.org, revised Aug 2022.
    9. Yu Chen, 2019. "Monotonicity in optimal mechanisms in general quasi-linear environments with a continuum of types," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 277-290, December.
    10. Balzer, Benjamin & Schneider, Johannes, 2023. "Mechanism design with informational punishment," Games and Economic Behavior, Elsevier, vol. 140(C), pages 197-209.
    11. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.

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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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