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Now suppose that in addition to the two inputs described above the manufacturer also needs a third input (call it C). Only the supplier can
Now suppose that in addition to the two inputs described above the manufacturer also needs a third input (call it C). Only the supplier can produce this input and it can choose either a low level of effort (ec = 0) or a high level of effort (ec = 1). If the supplier produces input C, then its cost of choosing ec = 0 is 0 while its cost of choosing ec = 1 is 25 and the manufacturer's revenue will be r = 30(eb es ec). Can a contract of the form (t,T), where t is a share of the total revenue and T is a lump sum (which can be negative or positive), achieve the vertically integrated solution for the manufacturer
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