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Optimal Contract Orders and Relationship-Specific Investments in Vertical Organizations
Parlane, Sarah; Tsai, Ying-Yi
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. Not applicable AMS
Keyword(s): Moral Hazard; Vertical Organization; Supply Base Management; Contract Order Size; Relationship-specific Investment; Strategic Outsourcing
Publication Date:
Type: Working paper
Peer-Reviewed: Unknown
Language(s): English
Institution: University College Dublin
Publisher(s): University College Dublin. School of Economics
First Indexed: 2013-11-01 05:38:29 Last Updated: 2018-10-11 16:54:16