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Competition or Compensation: Supplier Incentives under the American and Japanese Subcontracting Systems
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.
(JEL L14, L15, and L22).
Type
Journal articlePermalink
https://hdl.handle.net/10161/1722Collections
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Curtis R. Taylor
Professor of Economics
Taylor's primary research interest is microeconomic theory with emphasis on the areas
of Industrial Organization, Political Economy, and the Theory of Contracts. He has
worked on a variety of topics such as: the optimal design of research contests, the
causes and timing of market crashes, and consumer privacy. Professor Taylor's research
has been supported by grants from the National
Science Foundation, the U.S. Department of Agriculture, and the Texas Higher Education
Coordinating Board, am
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