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Contracting with Private Knowledge of Production Capacity

Contracting with Private Knowledge of Production Capacity We analyze the design of procurement contracts when the supplier is privately informed about both his innate production capacity (K) and his innate unit cost of production. We identify conditions under which the supplier will strategically employ an inefficient production technology to expand output above K. We also show that when the buyer employs the simple fixed‐price cost‐reimbursement (FPCR) contracts in the setting examined by Rogerson (2003), the supplier has no incentive to exaggerate K. Furthermore, the buyer can secure with FPCR contracts at least 75% of the surplus she secures with fully optimal contracts. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Contracting with Private Knowledge of Production Capacity

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References (18)

Publisher
Wiley
Copyright
Copyright © 2015 Wiley Periodicals, Inc.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12112
Publisher site
See Article on Publisher Site

Abstract

We analyze the design of procurement contracts when the supplier is privately informed about both his innate production capacity (K) and his innate unit cost of production. We identify conditions under which the supplier will strategically employ an inefficient production technology to expand output above K. We also show that when the buyer employs the simple fixed‐price cost‐reimbursement (FPCR) contracts in the setting examined by Rogerson (2003), the supplier has no incentive to exaggerate K. Furthermore, the buyer can secure with FPCR contracts at least 75% of the surplus she secures with fully optimal contracts.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Oct 1, 2015

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