Cost‐sharing procurement contracts with embedded reciprocal behavior

Abstract

AbstractThis paper develops a simple linear formulation of cost‐sharing procurement contracts into which reciprocal behavior is embedded. The comparative static analysis shows that the reciprocal behavior is negatively associated with the incentive. Both the cost uncertainty and the supplier's risk aversion have a positive influence on the reciprocal behavior and cooperation between buyers and suppliers. Compared to the second‐best solution in the existing principalagent literature under asymmetric information, this paper finds that the presented model is a Pareto improvement under modest restriction even if cost‐reducing effort is unverifiable. The reciprocal model has the properties of first‐best optimal social surplus.