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Competition or Compensation: Supplier Incentives under the American and Japanese Subcontracting Systems

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  • Taylor, Curtis R
  • Wiggins, Steven N

Abstract

Two fundamentally different subcontracting systems arise as distinct solutions to the quality control problem facing an input buyer. The 'American' system involves competitive bidding on each contract, large orders, and inspections. The 'Japanese' system involves repeat purchases from a supplier who earns a premium, small orders, and no inspections. Both systems may coexist as local solutions, but the global optimum is determined by the ratio of set-up to inspection costs. This suggests that the adoption of flexible manufacturing equipment and rising product complexity may be responsible for the shift from the American to the Japanese system observed in many industries. Copyright 1997 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 87 (1997)
Issue (Month): 4 (September)
Pages: 598-618

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Handle: RePEc:aea:aecrev:v:87:y:1997:i:4:p:598-618

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Cited by:
  1. John McLaren, 2000. ""Globalization" and Vertical Structure," American Economic Review, American Economic Association, vol. 90(5), pages 1239-1254, December.
  2. Felli, Leonardo & Koenen, Johannes & Stahl, Konrad O., 2011. "Competition and Trust: Evidence from German Car Manufacturers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 349, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Blonski, Matthias & Spagnolo, Giancarlo, 2002. "Relational Contracts and Property Rights," CEPR Discussion Papers 3460, C.E.P.R. Discussion Papers.
  4. Miller, Andrew D. & Langley, Suchada V. & Chambers, William, 2003. "Current Issues Affecting Trade And Trade Policy: An Annotated Literature Review," Working Papers 14606, International Agricultural Trade Research Consortium.
  5. Spencer, Barbara J & Qiu, Larry D, 2001. "Keiretsu and Relationship-Specific Investment: A Barrier to Trade?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 871-901, November.
  6. Rauch, J E & Watson, Joel, 1999. "Starting Small in an Unfamiliar Environment," University of California at San Diego, Economics Working Paper Series qt4rp145hc, Department of Economics, UC San Diego.
  7. Chih-Hai Yang & Ku-Hsieh Chen, 2009. "Are small firms less efficient?," Small Business Economics, Springer, vol. 32(4), pages 375-395, April.
  8. Plambeck, Erica L. & Taylor, Terry A., 2004. "Partnership in a Dynamic Production System," Research Papers 1892, Stanford University, Graduate School of Business.
  9. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
  10. Oliver Gürtler, 2010. "Haggling for Rents, Relational Contracts, and the Theory of the Firm," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 62(4), pages 359-377, October.
  11. Gal-Or, Esther, 2002. "Flexible manufacturing systems and the internal structure of the firm," International Journal of Industrial Organization, Elsevier, vol. 20(8), pages 1061-1096, October.
  12. Sofia Lundberg, 2005. "Restrictions on Competition in Municipal Competitive Procurement in Sweden," International Advances in Economic Research, Springer, vol. 11(3), pages 329-342, August.

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