Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations

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Title: Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations
Authors: Parlane, Sarah
Tsai, Ying-Yi
Permanent link: http://hdl.handle.net/10197/4811
Date: Oct-2013
Abstract: This paper characterizes the optimal contracts issued to suppliers when delivery is subject to disruptions and when they can invest to reduce such a risk. When investment is contractible dual sourcing is generally optimal because it reduces the risk of disruption. The manufacturer (buyer) either issues symmetric contracts or selects one supplier as a major provider who invests while the buffer supplier does not. An increased reliance on single sourcing or on a major supplier is optimal under moral hazard. Indeed, we show that order consolidation increases the manufacturer’s profits because it serves as an incentive device in inducing investment.
Funding Details: Not applicable
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Keywords: Moral HazardVertical OrganizationSupply Base ManagementContract Order SizeRelationship-specific InvestmentStrategic Outsourcing
Other versions: http://www.ucd.ie/t4cms/WP13_16.pdf
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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