Demand Uncertainty, Returns Policies, and Asymmetric Information

In this paper we show that contracts based on the return of unsold output may play a subtler role in the supplier-retailer relationship than was previously thought. In addition to permitting risk to be transferred from the retailer to the supplier, an appropriately constructed return policy can be used by the supplier to overcome the informational advantage possessed by the retailer, and circumvent the adverse selection problem that would otherwise arise.