Econometrica: Jul, 2004, Volume 72, Issue 4

The Organization of Supplier Networks: Effects of Delegation and Intermediation

https://doi.org/10.1111/j.1468-0262.2004.00529.x
p. 1179-1219

Dilip Mookherjee, Masatoshi Tsumagari

In a one‐principal two‐agent model with adverse selection and collusion among agents, we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting. Delegation to an intermediary is also not in the principal's interest if the agents supply substitutes. It can be beneficial if the agents produce complements and the intermediary is well informed.