Strategic Delegation in Procurement

Abstract

In a …rm organized into business units, we show when pro…tability increases if procurement is delegated to the division in charge of production. We highlight that our results are driven by the business unit having a di¤erent objective function than Headquarters. The pro…tability of procurement delegation is a¤ected by the essentiality of production facilities to the activities of the …rm, and by strategic distortions in both transfer and input prices. We also look at vertical separation of activities as an alternative to procurement delegation.