Procurement with Asymmetric Information About Fixed and Variable Costs

37 Pages Posted: 15 Jul 2018

See all articles by Rick Antle

Rick Antle

Yale School of Management

Peter Bogetoft

Copenhagen Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2018

Abstract

We investigate optimal rationing of resources and organizational slack when a principal procures from an agent with private information about fixed and variable costs. We study the problem in a two-period setting with persistent types and investigate how the optimal rationing and slack depend on whether production increases or decreases over time. We find that rationing in a dynamic model with persistent types is extra costly, since the types that are eliminated in Period 1 might have been attractive in Period 2. The cost of rationing increases with the variability of production. If production levels are increasing (decreasing), the principal will be cautious when eliminating types with low variable (fixed) costs in Period 1, since these types are particularly profitable in Period 2. When production is more stable over time, harsher rationing can be applied in Period 1, followed by less-harsh rationing, if any, in Period 2.

Keywords: Cost accounting, Fixed and variable costs, Production contracting, Dynamic model, Resource rationing, Organizational slack, Contracting, Cost functions, Production management, Managerial accounting

JEL Classification: C72, C76, D21, L24, M41

Suggested Citation

Antle, Rick and Bogetoft, Peter, Procurement with Asymmetric Information About Fixed and Variable Costs (June 14, 2018). Available at SSRN: https://ssrn.com/abstract=3201651 or http://dx.doi.org/10.2139/ssrn.3201651

Rick Antle (Contact Author)

Yale School of Management ( email )

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Peter Bogetoft

Copenhagen Business School ( email )

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Denmark
+45 23326495 (Phone)

HOME PAGE: http://https://www.cbs.dk/en/research/departments-and-centres/department-of-economics/staff/pbeco

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