Supply contracting under dynamic asymmetric cost information

35 Pages Posted: 26 Feb 2024

See all articles by Luca Di Corato

Luca Di Corato

Ca Foscari University of Venice - Dipartimento di Economia

Michele Moretto

University of Padua, Dep of Economics and Management

Date Written: February 23, 2024

Abstract

We consider a long-term contractual relationship in which a buyer procures a fixed quantity of a product from a supplier and then sells it on the market. The production cost is private information and evolves randomly over time. The solution to this dynamic principal-agent problem involves a periodic two-part payment. The fixed part of the payment depends on the initial supplier’s cost type while the other is contingent on the current cost type. A notable feature is that, by using the information about the initial cost type, the buyer can reduce the burden of information rents paid for the revelation of the future cost type. We show that the distortion, resulting from information asymmetry, remains constant over time and decreases with the initial type. Lastly, we show that our analysis immediately applies also when input prices are private information and evolve randomly over time.

Keywords: Dynamic Principal-Agent model, Supply contracting, Continuous time, Two-part payment

JEL Classification: C61, D82, D86

Suggested Citation

Di Corato, Luca and Moretto, Michele, Supply contracting under dynamic asymmetric cost information (February 23, 2024). FEEM Working Paper No. 04, Available at SSRN: https://ssrn.com/abstract=4738581 or http://dx.doi.org/10.2139/ssrn.4738581

Luca Di Corato (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Michele Moretto

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

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