THE RIGHT TO RETURN

This article studies the allocation of responsibility for unsold inven tory, provision for which is made in practically every distribution co ntract. The two extreme cases are the consignment contract, which allo cates all the burden to the manufacturer, and the no-return contract, in which retailers purchase the merchandise outright and assume respon sibility for unsold inventory. Contract choices are shown to vary acro ss countries, industries, products and types of transactions. The arti cle identifies six main factors affecting this choice: optimal invento ry policy in a stochastic retail demand environment, relative advantag e in disposing of the unsold inventory, optimal risk allocation, incen tives to invest in promotions and provide services to increase consume r demand, information asymmetry, and costs associated with the consign ment contract per se. Several testable implications are presented, and the choice of contracts in the publishing industry is shown to be con sistent with the predictions of the model.