Risk absorption in Japanese subcontracting : a microeconometirc study on the automobile industry

Abstract

Prevalence of subcontracting in Japan has traditionally been ascribed to risk shifting behavior of manufacturers. But, Asanuma's field research has elicited the following. First, in transactions with those suppliers with which it maintains longstanding relations, each typical manufacturer absorbs risks to a nonnegligible degree. Second, the degree tends to be higher (1) the larger the share occupied by the manufacturer in the total sales of the supplier; and (2) the more rudimentary the category of the item transacted viewed from evolutionary paths of suppliers. We adapt the principal-agent model derived by Kawasaki and McMillan based on a fundamental result acquired by Holmstrom and Milgrom on linearity of the optimal conpensation scheme, construct a set of data on individual suppliers to each of four major automobile manufacturers, and quantitatively verify the above propositions.