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
Date Written: February 1999
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: Suggested Citation