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Innovation and waste in supply chain management

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  • Peitz, Martin
  • Shin, Dongsoo

Abstract

We study a supply chain relationship in which the buyer outsources production of a component to the supplier. The buyer also produces a component and combines it with the supplier's input to yield the final output. The supplier can upgrade production of his input via costly innovation. Neither the supplier's effort for innovation nor the result of the innovative activity can be publicly verified. We show that, when the cost of innovation is large, the buyer's optimal contract may induce ‘wasting’ a fraction of the supplier's input.

Suggested Citation

  • Peitz, Martin & Shin, Dongsoo, 2013. "Innovation and waste in supply chain management," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 191-199.
  • Handle: RePEc:eee:jeborg:v:86:y:2013:i:c:p:191-199
    DOI: 10.1016/j.jebo.2012.11.013
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    References listed on IDEAS

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    Cited by:

    1. Peitz, Martin & Shin, Dongsoo, 2015. "Capital-labor distortions in project finance," Working Papers 15-01, University of Mannheim, Department of Economics.

    More about this item

    Keywords

    Agency; Innovation; Supply chain; Waste;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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