Strategic Delegation in Procurement
Abstract: In a firm organized into business units, we show that profitability increases if procurement is delegated to the division in charge of production. We emphasize that our results are driven by the business unit having a different objective function than the headquarters (HQ). The profitability of procurement delegation is affected by how essential the production facilities are to the activities of the firm, and by strategic distortions in both transfer and input prices. We also examine the vertical separation of activities as an alternative to procurement delegation.
