Backward Partial Vertical Ownership for Supply Reliability Under Disruption Risk

Supply disruption management requires not only operational risk mitigation but also sustained incentives for upstream reliability investment. This study examines whether backward partial vertical ownership can improve delivery reliability when a dominant retailer procures from a manufacturer whose reliability-enhancing effort is costly. We develop a retailer-led Stackelberg model and compare a linear-procurement no-ownership benchmark with a backward-ownership structure in which the retailer obtains a proportional residual claim without direct operational control. The results show that ownership allows part of the upstream return generated by procurement support to flow back to the retailer, thereby reducing its effective support cost, increasing the procurement price, and inducing greater manufacturer reliability-enhancing effort. Within the proposed model, any positive ownership share improves reliability-enhancing effort and gross operational supply chain profit relative to linear procurement, although the retailer consistently prefers a higher share while the manufacturer prefers a unique interior share. We therefore introduce a lump-sum net transfer and Nash bargaining to implement Pareto-improving ownership arrangements. The ownership share determines reliability incentives and cooperative surplus, whereas the transfer payment satisfies participation constraints and allocates the gains; bargaining power affects surplus distribution but not delivery reliability or operational efficiency. In the frictionless model, the bargaining objective approaches its supremum as the ownership share approaches the unattained theoretical upper boundary, and manufacturer reliability-enhancing effort and total supply chain profit converge to their centralized levels. When capital frictions are introduced, positive gross operational value need not imply positive net cooperative surplus after implementation costs, and the optimal ownership share becomes interior and decreases with capital frictions. These findings identify backward partial ownership as a complementary governance mechanism for improving supply reliability relative to linear procurement and explain why minority ownership may be optimal in practice.