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| Author: | Cella, M. |
| Title: | Monitoring subcontracting in a suppliers' hierarchy |
| Journal: | Oxford Economic Papers
2011 : JUL, VOL. 63:3, p. 523-548 |
| Index terms: | economics production organization asymmetric information regulations |
| Language: | eng |
| Abstract: | This paper considers the contractual hierarchy of a principal contracting with a contractor below her who then contracts with a subcontractor. The principal needs goods made from both firms in equal proportions. The question contemplated is whether, at no cost, the principal would wish to monitor the contract between the subcontractor and contractor. Without monitoring the contractor determines the type of the subcontractor. Thus, when contracting with the principal he is able to extract an information rent on this knowledge. Monitoring would expose the subcontractor type and hence lower the principal's bill. However, if the principal monitors the contract between contractor and subcontractor he may decide to not screen the subcontractor. So, the contractor must have an incentive to screen below. The paper demonstrates that the second of these costs is smaller for specific parameter values, i.e. monitoring and incentivizing screening is cheaper than not monitoring. |
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