Initiating and Sustaining Supplier Involvement in Development Projects: a Behavioral Investigation

While suppliers are often an excellent source of product innovation for buyers, their propensity to undertake or continue an innovation project is often elusive. This study examines what factors, including characteristics of the innovation project or the supplier’s decision environment, influence the decision to accept and subsequently continue an innovation project involving significant financial investment and cost uncertainty. Through a series of controlled human experiments motivated by behavioral theory, we find that acceptance rates increase when projects are characterized by low real options value or represent entirely new (versus replacement) revenue. While these factors have less influence on the supplier’s decision to continue the project, once accepted, continuation rates do increase if acceptance and continuation decisions are made by the same person. We also find that the buyer’s choice of contract frame for sustaining supplier engagements (penalty versus reward) has a significant impact on acceptance rates.