Supplier selection based on geographical location: A study built on the agency theory.

The agency theory is relevant for symbiotic relationships in which a principal delegates a certain task to an agent. The theory has two key elements: adverse selection and moral hazard. Adverse selection poses a potential problem to supplier selection while moral hazard damages the principal during the relationship. In this study the agency theory is applied to buyer-supplier relationships to identify whether adverse selection and moral hazard have a higher probability of occurring based on location. Knowledge on this subject may aid purchasers in their supplier selection processes. In order to gain data on the matter, twenty-one companies and their suppliers were analysed through interviews with experts in the purchasing field. The suppliers were categorised based on geographical location. The data in this study showed differences in both adverse selection and moral hazard based on locational aspects of the suppliers.