Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96252
Authors: 
Parlane, Sarah
Tsai, Ying-yi
Year of Publication: 
2013
Series/Report no.: 
Working Paper Series, UCD Centre for Economic Research 13/16
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.
Subjects: 
Moral Hazard
Vertical Organization
Supply Base Management
Contract Order Size
Relationship-specific Investment
Strategic Outsourcing
JEL: 
D23
D86
L24
Document Type: 
Working Paper

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