Premium
Distorted Input Ratios in Vertical Relationships *
Author(s) -
Peitz Martin,
Shin Dongsoo
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12382
Subject(s) - commit , supporter , economics , microeconomics , computer science , database , archaeology , history
A project leader sources an input from a supporter and combines it with an input produced in‐house. The leader has private information about the project's cost environment. We show that if the leader can commit to the in‐house input level, the input ratio is distorted upward when the in‐house input is not too costly – the in‐house input is produced in excess and thus partly wasted. By contrast, without the leader's commitment to the in‐house input level, the input ratio is distorted downward when the in‐house input is sufficiently costly – the outsourced input is produced in excess and thus partly wasted.