Option Contracts in Supply Chains

27 Pages Posted: 30 Jan 2008

See all articles by Sabine Böckem

Sabine Böckem

University of Basel

Ulf Schiller

University of Basel

Abstract

This paper considers optimal contracts in supply chains that consist of firms and face a potential investment hold-up problem. We show that option contracts may solve the incentive problems. First, we provide case-study evidence for the use of option contracts in the semiconductor industry. As our second contribution, we generalize the earlier option contract approach by introducing continuous quantities. Third, we extend the setting to n parties. For long supply chains, the first-best allocation can be achieved if there is a particular order of renegotiations.

Suggested Citation

Böckem, Sabine and Schiller, Ulf, Option Contracts in Supply Chains. Journal of Economics & Management Strategy, Vol. 17, Issue 1, pp. 219-245, Spring 2008. Available at SSRN: https://ssrn.com/abstract=1088533 or http://dx.doi.org/10.1111/j.1530-9134.2008.00176.x

Sabine Böckem (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Ulf Schiller

University of Basel ( email )

Peter-Merian-Weg 6
Basel, 4002
Switzerland

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