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http://hdl.handle.net/2451/27831
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| Title: | From Vendors to Partners: Information Technology and Incomplete
Contracts in Buyer-Supplier Relationships |
| Authors: | Bakos, Yannis
Brynjolfsson, Erik |
| Issue Date: | Jun-1993 |
| Publisher: | Journal of Organizational Computing |
| Series/Report no.: | CeDER-PP-1993-01 |
| Abstract: | As search costs and other coordination costs decline, theory predicts
that firms should optimally increase the number of suppliers with which
they do business. Despite recent declines in these costs due to
information technology, there is little evidence of an increase in the
number of suppliers used. On the contrary, in many industries, firms are
working with fewer suppliers. This suggests that other forces must be
accounted for in a more complete model of buyer supplier relationships.
This article uses the theory of incomplete contracts to illustrate that
incentive considerations can motivate a buyer to limit the number of
employed suppliers. To induce suppliers to make investments that cannot
be specified and enforced in a satisfactory manner via contractual
mechanism, the buyer must commit not to expropriate the ex post surplus
from such investments. Under reasonable bargaining mechanisms, such a
commitment will be more credible if the buyer can choose from fewer
alternative suppliers. Information technology increases the importance
of noncontractible investments by suppliers, such as quality,
responsiveness, and innovation; it is shown that when such investments
are particularly important, firms will employ fewer suppliers, and this
will be true even when search and transaction costs are very low. |
| URI: | http://hdl.handle.net/2451/27831 |
| Appears in Collections: | CeDER Published Papers
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