Managing Buyer-Supplier Contracts in Biotechnology: The Effect of Downstream Investments on Contract Choice

Washington University, John M. Olin School of Business, Olin Working Paper No. OLIN-97-18

Posted: 17 Apr 1999

See all articles by Kyle Mayer

Kyle Mayer

University of Southern California - Management and Organization Department

Jackson A. Nickerson

Washington University in St. Louis - John M. Olin Business School

Date Written: February 1999

Abstract

A remarkable feature of buyer-supplier contracting is the variety of supply contracts employed even by a single buyer. This paper empirically examines the variation of supply contracts for a single biotechnology firm. In particular, the paper predicts that contract dimensions of supply inspection, supplier plant inspection, and contract customization, are chosen to safeguard against supplier-malfeasance, which could lead to the nonverifiable devaluation a buyer's downstream idiosyncratic investments. The downstream idiosyncratic investments of interest include reputational capital with consumers and the FDA and production systems. Our empirical analysis employs a four-equation multivariate Probit to analyze 137 supply contracts. As predicted by our theory, we find that contract terms are chosen to minimize supplier malfeasance hazards.

JEL Classification: L69

Suggested Citation

Mayer, Kyle and Nickerson, Jackson A., Managing Buyer-Supplier Contracts in Biotechnology: The Effect of Downstream Investments on Contract Choice (February 1999). Washington University, John M. Olin School of Business, Olin Working Paper No. OLIN-97-18. Available at SSRN: https://ssrn.com/abstract=157357

Kyle Mayer

University of Southern California - Management and Organization Department ( email )

Los Angeles, CA 90089
United States

Jackson A. Nickerson (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6366 (Phone)
314-935-6359 (Fax)

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