Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/109710
Authors: 
Parlane, Sarah
Tsai, Ying-Yi
Year of Publication: 
2014
Series/Report no.: 
Working Paper Series, UCD Centre for Economic Research 14/17
Abstract: 
This paper analyses procurement from two, risk-averse, suppliers who are responsible for the timely delivery of some inputs. Their production is subject to inherent disruptions. We characterize the optimal contracts when suppliers can invest to lower the risk of delays that are costly to the manufacturer. When investment is contractible, we show that issuing asymmetric contracts, whereby the buyer is more heavily dependent on one supplier, is optimal as the cost associated with supply disruptions increases. When investment is not contractible, we show that large orders can be used as an incentive devise. Thus, the strategy consisting of selecting one supplier as a main producer and another as a buffer has further desirable advantages under moral hazard.
Subjects: 
Investment
Risk
Costly Delays
Order Size and Moral Hazard
JEL: 
D23
D86
L24
Document Type: 
Working Paper

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