Optimal Stockist Selection and Contract Design: Evidence from a Supply Chain in India
72 Pages Posted: 12 Jun 2024 Last revised: 11 Jan 2025
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
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