Global sourcing and supply chain disruptions

This paper studies global sourcing under incomplete contracts when a buyer can source from one or two foreign suppliers, subject to independent disruption risk. Extending Ornelas e Turner (2012), we show that multi-sourcing introduces a strategic business-stealing motive for relationship-specific investment, which can offset the standard hold-up problem and, for some parameters, generate overinvestment. In this environment, disruption risk affects not only the value of diversification, but also the strength of investment distortions: when relationships are not reliable, underinvestment remains the dominant problem, whereas lower disruption risk strengthens competition between suppliers and may lead to excessive private investment. Tariffs may improve welfare when uncertainty is low, since they reduce excessive private investment. However, they worsen outcomes when uncertainty is high, since underinvestment remains dominant. Comparing private and socially optimal diversification, we find that private firms may diversify more or less than the social planner depending on whether the competitive gains from multi-sourcing are strong enough to offset the hold-up distortion.