From traditional transactions to B2B: a contract theoretical analysis

This paper extends Alderete (2009) model of screening contracts to build electronic commerce between a large firm and a small and medium sized enterprise (SME) supplier. The large firm (principal) must choose among SME suppliers (agents) that differ in costs and utility for the ICT technology (network good). The method is based on Compte and Jehiel (2008), whose main insight is that when several potential candidates compete for the task, the principal will in general improve the performance of her firm by inducing the member candidates to assess their competence before signing the contract (through an appropriate choice of contracts). In the presence of different preferences for the network good, we show that social surplus increases.