Salesforce Contracting Under Supply Uncertainty
31 Pages Posted: 18 Oct 2017
Date Written: October 17, 2017
A firm contracts with a salesperson who exerts effort to increase uncertain demand when product supply is uncertain and may be limited. Unmet demand is unobservable so that the signal of effort is censored in expectation. The optimal contract has an extreme form in which a bonus is provided only for achieving the highest sales outcome, even if low realized sales are due to low realized supply. If the firm’s supply-related actions are unobservable, double-sided moral hazard emerges, which makes the optimal contract smoother. Under certain conditions, the firm prefers to postpone contracting until after supply is realized.
Keywords: Salesforce compensation, yield uncertainty, double-sided moral hazard
JEL Classification: D82, D86, J33
Suggested Citation: Suggested Citation