This paper investigates the contract design problem of a producer when he purchases parts from a supplier, and there is incomplete information regarding the quality of the parts. This is the first game-theoretic model of quality control that captures this informational asymmetry. We focus on two compensation schemes embedded in the contract, namely, price rebate (when inspection is done upon receipt of the parts) and warranty. We show that when a full-price rebate is not possible and the producer and the supplier have to share the damage costs, an optimal contract is such that the supplier compensates the producer by the same amount, regardless of his quality type. However, a supplier with low quality is more likely to be offered a contract with an inspection scheme, while a supplier with high quality is constrained with a warranty scheme. We also show that when the producer need not share the cost in exactly one of the compensation schemes, he may still offer the other compensation scheme to a supplier type depending on the relative costs involved, the maximum compensation cost acceptable by all supplier types, and his ex ante beliefs about the quality level of the supplier.

Using a game theoretic approach and integrating research on managerial succession, family businesses, and transaction cost economics, we examine how the degree of idiosyncrasy of a family business and the ability of the family's offspring affect succession. Contrary to the popular belief that successors to family businesses are often offspring because of nepotism, we propose an economic rationale that this is due to the appropriation risk and the agency paradox that family businesses encounter in engaging agents.