Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/298052 
Year of Publication: 
2024
Series/Report no.: 
Working Paper No. 04.2024
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
We consider a long-term contractual relationship in which a buyer procures a fixed quantity of a product from a supplier and then sells it on the market. The production cost is private information and evolves randomly over time. The solution to this dynamic principal-agent problem involves a periodic two-part payment. The fixed part of the payment depends on the initial supplier's cost type while the other is contingent on the current cost type. A notable feature is that, by using the information about the initial cost type, the buyer can reduce the burden of information rents paid for the revelation of the future cost type. We show that the distortion, resulting from information asymmetry, remains constant over time and decreases with the initial type. Lastly, we show that our analysis immediately applies also when input prices are private information and evolve randomly over time.
Subjects: 
Dynamic Principal-Agent model
Supply contracting
Continuoustime
Two-part payment
JEL: 
C61
D82
D86
Document Type: 
Working Paper

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