Abstract
In this paper, we introduce quality differences in vertical market and compare the managerial delegation contracts of downstream firms. We find that the owner of a downstream firm that produces low‐quality products induces the manager to behave more aggressively when the marginal cost coefficient is low. While when marginal cost coefficient is high, the owner of a downstream firm that produces high‐quality products induces the manager to behave more aggressively. It is further found that managerial delegation can improve the profits of downstream firms but reduce the consumer surplus and social welfare.
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