We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Optimal sequential contract with a risk‐averse supplier.
- Authors
Dai, Chifeng
- Abstract
We study optimal contracts in environments where a risk‐averse supplier discovers cost information privately and gradually over time: the supplier is privately informed about its cost uncertainty at the time of contracting and discovers the realization of cost condition privately after contracting and before production. We show that both the buyer and the supplier prefer more cost uncertainty when the supplier is not very risk‐averse but less cost uncertainty when the supplier is sufficiently risk‐averse. However, the buyer always prefers to contract before the cost uncertainty resolves regardless of the supplier's degree of risk aversion. The nature of the optimal contract also depends on the supplier's risk preference. A separating contract is optimal when the supplier is not very risk‐averse; however, a pooling contract, which offers the same contract terms regardless of the cost uncertainty, can be optimal when the supplier becomes sufficiently risk‐averse. Moreover, the optimal production schedule is often characterized by "inflexible rules."
- Subjects
SUPPLIERS; PRODUCTION scheduling; CONTRACTS; RISK aversion
- Publication
Canadian Journal of Economics, 2021, Vol 54, Issue 1, p92
- ISSN
0008-4085
- Publication type
Article
- DOI
10.1111/caje.12490