Maverick buying: Eliminate, participate, leverage?

Companies have consolidated purchasing volumes that were scattered across organizational units to lower purchasing prices. To realize these benefits companies frequently opt for a hybrid organizational structure that is conducive to a specific form of non-compliant behavior, referred to as maverick buying: local business units bypass official processes and source from suppliers other than the designated supplier. This non-compliant action counteracts companies' efforts to benefit from volume consolidation. We consider maverick buying as a form of hidden action in a principal-agent framework and provide a formal analysis of strategies that companies employ to avoid maverick buying or remedy its negative consequences. Our results suggest that the conventional strategy of monitoring and penalizing agents in case of non-compliance not only has clear limitations but may be ineffective: rather than trying to eliminate maverick buying through monitoring, companies should, under some conditions, participate in agents' superior market knowledge. We propose a self-selection model: the principal offers contract menus, termed participation menus, tailored to agents with attractive outside options and agents without incentives to “buy maverick”. We demonstrate that participation menus perform particularly well when conventional monitoring fails and that in some situations they can be employed to leverage the agents' purchasing capabilities.