Vertical control, opportunism, and risk sharing
Journal article, Peer reviewed
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Date
2020Metadata
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- Department of Economics [301]
- Registrations from Cristin [10402]
Abstract
A manufacturer who offers secret contracts faces an opportunism problem: She undercuts her own input prices and fails to offset retail competition. I show that this problem diminishes when retailers are risk averse and face demand uncertainty. Risk aversion and uncertainty create a bilateral risk sharing incentive that raises equilibrium input prices above marginal cost. The manufacturer can therefore profit from downstream risk aversion when retail competition is fierce.