Motivating Subcontractors to Perform Development and Design Tasks

Abstract

It is now common place for management commentators to argue that Western assemblers should learn from and attempt to replicate Japanese practices. One of these key practices relates to the way in which Japanese assemblers work closely with subcontractors to cooperate on design and development work. Although there has been much discussion of the potential benefits to moving over to Japanese style practices, we suggest that less consideration has been given to what revisions in governance structures (incentives) such a shift necessitates. Specifically, we argue that in order to motivate cooperation, careful attention need be directed to the provision of incentives for investment in relation to specific (cooperative) skills.

We formally model possibilities for cooperation between an assembler and subcontractor by considering the case where relation specific skills investment is dichotomous and non verifiable. In such a setting we show how the above alluded to cooperation may not automatically be forthcoming because the subcontractor fears being held up by an opportunistic assembler after committing to the investment. Thus, we stress that careful attention needs be directed to the design of governance structures in order to insure cooperation is actually achievable. We then show that cooperation can be fostered by adopting governance procedures which take the form of a promotion ladder. A property of such procedures is that the necessary promotion motivational costs required to induce skills investment is greater than the private cost to a subcontractor of making the investment. Thus, calls to encourage subcontractors to become involved in additional tasks, should not be interpreted as having a universal prescriptive appeal as it is not self evident that assemblers will always be better off if subcontractors perform these tasks given that rents have to be paid. We show that the assembler should only promote subcontractors whose ability is above a defined critical level. Thus, the results of our analysis facilitates the development of a more nuanced understanding of the net benefits of Japanese style cooperative working practices and provides enhanced implementation guidelines on what governance procedures should be used.

JEL Classification: D23, J41, M40, M46