Marco Castellani, Università degli Studi di Udine: Delegation in vertical relationships: The role of reciprocity

Abstract: We develop a simple principal-agent model to describe reciprocal behavior between two firms: a buyer of an input and the better-informed supplier. This input can either be of standard or of upgraded quality and every upgrade is costly for the supplier. Buyer's preferred upgrade depends on the state of the world that materializes after the two firms have signed a contract for the provision of the input. We assume that quality above the standard level is non-contractible. Accordingly, if the buyer requires an upgraded quality, a selfish supplier produces the cheapest possible upgrade. We show that when the supplier is reciprocal, an adequately high price can align the incentives of the two firms. We further find that for reciprocal behavior to show up, it is enough that the supplier is moderately reciprocal. Lastly, we provide some intuitions about how our results change if the supplier must be granted positive profits.

The results were obtained thanks to the funding obtained from Programma operativo del Fondo sociale europeo 2014/2020 della Regione Friuli Venezia Giulia - Progetto "HEaD HIGHER EDUCATION AND DEVELOPMENT" OPERAZIONE 3 UNIUD (FP1619942003, canale di finanziamento 1420AFPLO3).

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