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Monitoring subcontracting in a suppliers' hierarchy

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  • Michela Cella

Abstract

Consider the following contractual hierarchy: a principal who contracts with a contractor below her who then contracts with a subcontractor. The principal requires goods made from both firms in equal proportions. The question we study is whether, at zero cost, the principal would wish to monitor the contract between the subcontractor and contractor. Without monitoring the contractor will determine the type of the subcontractor. Hence, when contracting with the principal he can extract an information rent on this knowledge. Monitoring would reveal the subcontractor type and so lower the principal's bill. However, if the principal monitors the contract between contractor and subcontractor then he may prefer to not screen the subcontractor. So, the contractor must be offered an incentive to screen below. The paper shows that the second of these costs is smaller for a range of parameter values, so that monitoring and incentivizing screening is cheaper than not monitoring. Copyright 2011 Oxford University Press 2011 All rights reserved, Oxford University Press.

Suggested Citation

  • Michela Cella, 2011. "Monitoring subcontracting in a suppliers' hierarchy," Oxford Economic Papers, Oxford University Press, vol. 63(3), pages 523-548, July.
  • Handle: RePEc:oup:oxecpp:v:63:y:2011:i:3:p:523-548
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    File URL: http://hdl.handle.net/10.1093/oep/gpr005
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    References listed on IDEAS

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    1. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-1797, November.
    2. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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    5. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer.
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    7. Jean-Jacques Laffont & David Martimort, 2000. "Mechanism Design with Collusion and Correlation," Econometrica, Econometric Society, vol. 68(2), pages 309-342, March.
    8. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    9. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
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    More about this item

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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