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

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1997-09-01

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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).

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Scholars@Duke

Taylor

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, among others.



He served as an associate editor for the  American Economic Review from 1995 to 2001, and is currently on the editorial boards of the RAND Journal of Economics, the Journal of Industrial Organization, the BE  Journal of Theoretical Economics, and the BE Journal of Economic Analysis and Policy.


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