Working Papers in Economics,
University of Bergen, Department of Economics

Abstract: I study one manufacturer that contracts secretly with two risk averse retailers that face uncertain demand. The need for risk sharing limits the manufacturer’s scope for opportunistic deviations. If retail competition is fierce, the manufacturer’s profit increases with the levels of risk aversion and uncertainty, i.e., there is no trade-off between risk sharing and industry efficiency. The results are consistent with stylized facts from empirical and experimental research on vertical relations, including the negative correlation between vertical integration and uncertainty.

Keywords: Vertically related markets; contracting externalities; imperfect information; risk sharing

JEL-codes: D81; L14; L42; L60; L81

25 pages, December 21, 2015

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