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Contract Design in Processing Trade
Author(s) -
Letizia Paolo
Publication year - 2018
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/deci.12296
Subject(s) - quality (philosophy) , delegation , delegate , leverage (statistics) , information asymmetry , industrial organization , business , production (economics) , product (mathematics) , control (management) , process (computing) , computer science , marketing , microeconomics , economics , management , philosophy , geometry , mathematics , epistemology , machine learning , programming language , operating system , artificial intelligence
Processing trade may involve buyers contracting with foreign producers to process and assemble intermediate inputs into a final product. The buyer may decide to either contractually control or delegate quality provision for his products. Quality control seems the obvious choice, especially in settings where the producer's production capability is not observable. Correspondingly, the traditional framework based on information asymmetry assigns no value to quality delegation, as the buyer's profits attained by contractually controlling quality can match those of any delegation arrangement. However, in practice, western buyers may also opt for delegating rather than controlling quality provision to their Chinese producers, which creates the need for a theoretical extension of the previous framework. In this article, we enrich the framework of information asymmetry by including expertise asymmetry , which reflects the producers' superior expertise in the production process. With expertise asymmetry, delegating quality may be beneficial as it allows the producer to leverage on his superior expertise and ultimately take more efficient quality decisions.