Supply chain contract: Informed manufacturer (principal) and risk undertake

Abstract

We provide a simple incentive model with a privately informed manufacturer (principal) who provides goods to retailer (agent) in which the manufacturer has private information about the goods' type he offers to the retailer. The type affects the market demand. We show how the manufacturer's mechanism is designed if he holds private information. Our main finding is that the equilibrium that gives the highest profit to the manufacturer is a pooling equilibrium in which the payment is independent of the manufacturer's private information. This highlights that the contracting under private information on the manufacturers' side make the manufacturer undertake more risk than contracting under symmetric full information. © Springer-Verlag Berlin Heidelberg 2014.