The Optimality of Ad Valorem Contracts

• 成果类型: Article
• 署名作者: Hagiu, Andrei; Wright, Julian
• 署名单位: Boston University; National University of Singapore
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2018.3180
• 发表日期: 2019
• 页码: 5219-5233
• 关键词: revenue sharing; channel coordination; moral hazard; private information

摘要

We provide a new theory of ad valorem contracts (i.e., contracts that vary with the value of the transaction), which can explain why such contracts are widely used between vertically related parties (e.g., in franchising and licensing). Ad valorem contracts allow upstream firms (principals) to preserve their own incentives to make ongoing investments in the channel and deal with pricing distortions caused by channel coordination problems, while at the same time adjusting their investment on the basis of demand shocks that are only observed by the downstream firms (agents). We show that the optimal ad valorem contract allows the principal to achieve the same profits as if it could observe the demand shocks and control price. This optimal contract makes use of revenue sharing (to balance investment incentives and make the principal's investment responsive to demand through price), upfront fixed fees (to extract the agents' expected profit), and an additional term that depends nonlinearly on either price or demand (to correct for remaining pricing distortions). Our results are robust to the introduction of competition between agents, production costs, and imperfect monitoring of the agents' prices.