Vertical control, opportunism, and risk sharing

摘要

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. (C) 2020 The Author. Published by Elsevier B.V.