Optimal Stockist Selection and Contract Design: Evidence from a Supply Chain in India

72 Pages Posted: 12 Jun 2024 Last revised: 11 Jan 2025

See all articles by Wei Jiang

Wei Jiang

Hong Kong University of Science and Technology

Jussi Keppo

National University of Singapore (NUS) - NUS Business School

Yu Long

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics

Omkar Palsule-Desai

Indian Institute of Management Indore

Date Written: January 11, 2025

Abstract

We study incentives and contract design when a manufacturer can select, contract, and learn about its stockists. We model this relationship using a two-period principal-agent framework in which the manufacturer is the principal and the stockists are agents. We examine how competition among the stockists for future contracts and their career concerns on the level of future compensation influence the optimal contract. We show that competition incentivizes stockists to exert more effort, whereas career concerns have an opposite incentive, particularly when the manufacturer has dominant bargaining power. By analyzing the exploitation and exploration trade-off we show, for instance, that the manufacturer may explore less when there is more uncertainty about the stockist's capability. By calibrating our model to unique contract and sales data from an Indian potato chips manufacturer, our counterfactual analysis shows that the competition raises (career concerns decrease) the stockists' effort by more than 192% (77%) and the manufacturer's value by over 6% (about 3%).

Keywords: Competition, Contract Design, Bayesian Learning, Exploitation-exploration, Structural Estimation

Suggested Citation

Jiang, Wei and Keppo, Jussi and Long, Yu and Palsule-Desai, Omkar, Optimal Stockist Selection and Contract Design: Evidence from a Supply Chain in India (January 11, 2025). Available at SSRN: https://ssrn.com/abstract=4756644 or http://dx.doi.org/10.2139/ssrn.4756644

Wei Jiang (Contact Author)

Hong Kong University of Science and Technology ( email )

Clear water bay
Kowloon
Hong Kong
China

Jussi Keppo

National University of Singapore (NUS) - NUS Business School ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://https://www.jussikeppo.com

Yu Long

Hong Kong University of Science & Technology (HKUST) - Dept. of Industrial Engineering and Decision Analytics ( email )

Hong Kong

Omkar Palsule-Desai

Indian Institute of Management Indore ( email )

Rau-Pithampur Road
Indore, Madhya Pradesh 453556
India

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