Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations

Sarah Parlane and Ying-Yi Tsai

No 201316, Working Papers from School of Economics, University College Dublin

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.

Keywords: Moral Hazard; Vertical Organization; Supply Base Management; Contract Order Size; Relationship-specific Investment; Strategic Outsourcing (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-com, nep-cta, nep-hrm and nep-mic
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Citations: View citations in EconPapers (1)

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http://hdl.handle.net/10197/4811 First version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201316

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