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

44 Pages Posted: 10 Oct 2012

See all articles by Tomasz Obloj

Tomasz Obloj

HEC Paris - Strategy & Business Policy

Peter B. Zemsky

INSEAD - Strategy; Centre for Economic Policy Research (CEPR)

Date Written: November 9, 2012

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

Suggested Citation

Obloj, Tomasz and Zemsky, Peter B., Value Creation and Value Capture under Moral Hazard: Exploring the Micro-Foundations of Buyer-Supplier Relationships (November 9, 2012). INSEAD Working Paper No. 2012/111/ST. Available at SSRN: https://ssrn.com/abstract=2159033 or http://dx.doi.org/10.2139/ssrn.2159033

Tomasz Obloj (Contact Author)

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France

Peter B. Zemsky

INSEAD - Strategy ( email )

Boulevard de Constance
77305 Fontainebleau
France
+33 1 60 72 4162 (Phone)
+31 1 60 74 5500 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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