Value Creation and Value Capture under Moral Hazard: Exploring the Micro-Foundations of Buyer-Supplier Relationships

Abstract

We analyze the determinants of value creation and capture in a buyer-supplier relationship. In particular, we study how key contracting parameters, such as production efficiency, transactional integrity, incentive gaming and alignment affect outcomes when buyer faces competing suppliers. Bringing together the formalism of principal-agent framework with value-based analysis, we seek to understand the contracting micro-foundations behind choice of contracting partners and division of value. We show that transactional integrity and production efficiency are substitutes. We also find that distortion and resulting incentive gaming is unambiguously bad for welfare and hurts the buyer. For some suppliers however, value captured is maximized at intermediate levels of distortion. For alignment, we find that neither of the parties has incentives to sign a contract that maximizes value creation.

Keywords: agency theory, value-based strategy, biform games, value creation, value capture, organizational incentives

JEL Classification: C71, D21, M5, M52