Innovative upstream investments and input supply contracts

Abstract

We explore how a cost-minimizing buyer innovates through the use of both a mix of transaction modes — contracts and spot markets — to secure a single input, given endogenous choice of upstream investments. We broadly define innovation as the internal structuring of how a firm purchases its inputs given it has the option of making innovative upstream investments that affect both the contract vendor's costs and the buyer's reservation spot market price within a risky external environment. The model examines the use of transaction-specific upstream investments that reduces the input vendor's costs, truncates the distribution of spot market prices and allows the buyer to take advantage of the synergy between the two modes.

Citation

Kerkvliet, J. and Shogren, J.F. (2001), "Innovative upstream investments and input supply contracts", Libecap, G.D. (Ed.) Entrepreneurial inputs and outcomes: New studies of entrepreneurship in the United States (Advances in the Study of Entrepreneurship, Innovation and Economic Growth, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 327-348. https://doi.org/10.1016/S1048-4736(01)13011-0