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Delegation Vs. Control Of Component Procurement Under Asymmetric Cost Information & Price-Only Contracts

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Executive Summary

A manufacturer must choose to delegate component procurement to her tier-1 supplier, or to control component procurement by contracting with both the tier-1 supplier and the tier-2 component supplier. Each supplier knows its own production cost, but the other firms have only limited information about that cost. If the firms could use arbitrarily complex contracts, then the manufacturer would be indifferent between delegation and control. However, if the firms use price-only contracts, as is common in practice, either delegation or control can yield higher expected profit for the manufacturer.

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