This paper examines the interdependence between a firm's moral hazard problem and its roles as a buyer of inputs and seller of final products. We demonstrate that to maximize profit a firm needs to adapt incentive contracts to variations in the competitive environment of the supplier market....

We consider a repeated interaction between a manufacturing firm and a subcontractor. The realtionship between the two parties is characterized 1) by moral hazard, 2) by the fact that they do not have perfect knowledge about the base cost level of the project carried out by a subcontractor (the...