CONSIGNMENT CONTRACTING

Consignment is a unique contract form in which a middleman takes possession of a good owned by a seller, promotes its sale to buyers, and is compensated with a share of sales revenue. If no sale occurs possession reverts back to the seller. An alternative to consignment is a middleman contract in which the good is sold to a dealer. Dealers have incentive to choose the expected joint surplus maximizing level of promotional activity, while consignment agents will generally underinvest. This creates a strong presumption favoring the use of dealers. The analysis finds that if valuations are subjective, then highly optimistic sellers will tend to use consignment. Consignment also has a role in resale markets when sellers have relatively large reservation values. Dealers will not intermediate when expected net sales revenue is smaller than the seller's opportunity cost. On the other hand consignment gives sellers a chance to either make profitable sales or retain the good at its reservation value.