Supply chain resilience via partial integration

Abstract

How do buyers influence supplier decisions without vertical integration? Using novel daily timeline data from Indian manufacturing supply chains, we document partial integration: targeted buyer interventions -- monitoring, contingent contracts, and direct control of supplier decisions -- that replicate the functions of vertical integration across firm boundaries. We first show that supplier underinvestment in key inputs, driven by working capital constraints and noncontractibility of input use, is a central contracting friction in these supply chains. In response, buyers exert control over supplier input decisions rather than merely advancing cash. This involvement intensifies as contracting frictions worsen: an unanticipated input cost shock leads to direct buyer control of inputs for the most constrained suppliers. We develop a model that rationalizes these organizational choices. Buyers control input decisions to prevent resource diversion, while leaving suppliers to retain control of production to preserve output market incentives. The model also predicts that relational buyers with low monitoring and sourcing costs enjoy a comparative advantage in sourcing from constrained suppliers.