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Salesforce Contracting Under Supply Uncertainty

31 Pages Posted: 18 Oct 2017  

Tinglong Dai

Johns Hopkins University - Carey Business School

Kinshuk Jerath

Columbia University - Columbia Business School

Date Written: October 17, 2017

Abstract

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

Dai, Tinglong and Jerath, Kinshuk, Salesforce Contracting Under Supply Uncertainty (October 17, 2017). Columbia Business School Research Paper No. 17-103. Available at SSRN: https://ssrn.com/abstract=3054963 or http://dx.doi.org/10.2139/ssrn.3054963

Tinglong Dai (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Kinshuk Jerath

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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