The effect of contract theory on companies' utility in framework of agent theory (Iran Tire Company Case Study)

Document Type : Research Article

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Abstract

One of the negative phenomena that lead to the inappropriate decisions of economic agents in the market is asymmetric information. Therefore, Due to the importance of this subject and problems arising from it especially in companies and industrial organizations, in this paper, we make and solve numerical models of the raw material supply problems (an example of the adverse selection problems), and analyzing contract theory as a solution. We consider two supplier types (efficient and inefficient). We develop the first-best models, where the maker knows the supplier's type and second-best model, where the maker does not know the supplier's type. The results show that firstly a contract between raw material suppliers and Iran Tire company minimize the inefficiency resulted from asymmetric information and secondly Iran tire company second- best utility level is lower than the first- best one.

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Journal of Applied Economics Studies in Iran
Volume 5, Issue 18
July 2016
Pages 171-195

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