We consider a quantity flexibility contract in a supply chain, under price dependent demand. The demand is random and follows a multiplicative model. We show that the retail price that maximizes expected retailer profits, is higher than the price that would maximize profits if there was no...

Using the classic moral hazard problem with limited liability we characterize the optimal contracts when an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case....