Vianney Dequiet and David Martimort
"Delegated monitoring versus arm's length contracting"
Keywords: organizational design, hierarchical agency, supplier networks, consolidation, delegation
Abstract: This paper analyzes the optimal organization of input suppliers in a procurement context. We discuss when a top firm chooses to induce information sharing and active coordination between its suppliers (consolidation) rather than having them contract at arm's length (delegation). In designing the organization, the firm anticipates that different supplier networks have different costs of inducing information revelation from suppliers. When the cost of information sharing varies, the optimal organization exhibits various discrete degrees of consolidation. There is excessive arm's length contracting compared to the case where the top firm controls this organizational choice itself. The paper offers also a methodology to study in a unified framework various organizational forms analyzed separately in the literature.