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Delegating Pricing Authority to Sales Agents: The Impact of Kickbacks

Author

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  • Matthias Kräkel

    (Institute for Applied Microeconomics, University of Bonn, D-53113 Bonn, Germany)

  • Anja Schöttner

    (School of Business and Economics, Humboldt-Universität zu Berlin, D-10099 Berlin, Germany)

Abstract

We investigate a situation where a firm employing a sales agent faces moral hazard with respect to prospecting effort and the threat of collusion between agent and customer. We show that the firm should offer more pricing authority to the agent the more severe the moral hazard problem, although doing so further expands the agent’s discretion. Nevertheless, restricting the agent’s pricing authority such that he cannot sell to low-valuation customers is typically optimal to prevent collusion. We derive optimal collusion-proof contracts, describe conditions under which collusion arises in equilibrium, and study the optimal interaction between delegation, incentive pay, and the firm’s installed auditing technology.

Suggested Citation

  • Matthias Kräkel & Anja Schöttner, 2020. "Delegating Pricing Authority to Sales Agents: The Impact of Kickbacks," Management Science, INFORMS, vol. 66(6), pages 2686-2705, June.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:6:p:2686-2705
    DOI: 10.1287/mnsc.2019.3293
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    References listed on IDEAS

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    Cited by:

    1. Neven, Damien & Piccolo, Salvatore & Andreu, Enrique, 2021. "Price Authority and Information Sharing with Competing Principals," CEPR Discussion Papers 16753, C.E.P.R. Discussion Papers.
    2. Kräkel, Matthias, 2021. "On the delegation of authority," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 965-981.

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