Investments under vertical relations and agency conflicts

We examine the case of an investment project that, i) is characterized by uncertainty and irreversibility, ii) is undertaken in a decentralized setting and iii) its completion is conditional on the provision of an input by an outside supplier with market power. Our findings suggest that, if compared to a case where the input is insourced, the vertical relation increases the investment cost. Nevertheless, the effect on the timing and the value of the investment is ambiguous since it depends on the information endowment of the involved parties. We discuss three levels of information sharing among the links of the supply chain and we identify the cost, the timing and the value of the option to invest for each one of them.