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Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations
Author(s)
Date Issued
2013-10
Date Available
2013-10-31T09:13:39Z
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.
Sponsorship
Not applicable
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP13/16
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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