Using Hostages to Support Exchange: Dependence Balancing and Partial Equity Stakes in Japanese Automotive Supply Relationships

We examine the use of partial equity stakes and volume-based dependence balancing in Japanese automotive supply relationships. Building on Williamson's (1983) hostage model, we argue that the robustness of different types of hostage arrangement depends on the value, durability, and observability of the underlying hostages involved. In Japan, strong norms of obligation associated with equity affiliation, along with significant obstacles to equity divestment, make a partial equity stake a robust hostage-based arrangement. Volume-based dependence balancing--whereby an assembler skews purchase quantities toward suppliers that commit more of their capacity to serving that assembler's needs--constitutes a less robust form of hostage in this context. Volume-based dependence balancing may nonetheless be an effective arrangement when contracting hazards are more moderate. Our empirical analysis provides support for these arguments: We find evidence that Japanese auto assemblers hold equity stakes in those suppliers that would otherwise be particularly vulnerable to assembler opportunism; in relationships without equity investments, assemblers systematically manage their purchase volumes in a manner that is also consistent with efforts to make credible commitments to otherwise vulnerable suppliers. Copyright 2006, Oxford University Press.