Vertical Relationships, Hostages, and Supplier Performance : Evidence from the Japanese Automotive Industry

Since its first appearance, Williamson's (1983) hostage model of exchange has been highly influential in guiding analysis and interpretation of "non-standard" contracting arrangements. Prior research has developed a compelling case for the existence of hostage-type arrangements in many commercial settings, but direct evidence on how the presence of hostages impacts buyer or supplier behavior is still sparse. In this paper we examine how, in one particular context, the presence of a hostage impacts supplier performance under different demand conditions. We explore the extent to which Japanese automotive assemblers have "buffered" their affiliated suppliers from demand fluctuations to a greater extent than is the case for unaffiliated suppliers. Our empirical findings are consistent with the spirit of Williamson's model but highlight the subtlety of hostage arrangements in practice. In particular we find that assemblers indeed buffered their affiliated suppliers from the effects of the negative demand shock that occurred during the 1992-1995 recession, apparently favoring affiliates over unaffiliated suppliers during this period. However, we also find evidence of short-run "gap filling" by affiliated suppliers, whereby affiliated suppliers more frequently adjust production to accommodate assemblers' changing requirements in the course of routine demand fluctuations. We relate these findings to other research on Japanese supply networks and to more general research on the performance effects of firm boundary decisions