Sourcing parts of complex products: evidence on transactions costs, high-powered incentives and ex-post opportunism

This paper revisits evidence on the correlates of sourcing decisions in the US auto industry to see whether adoption of new contracting terms and earl y involvement of suppliers in design activities (e.g. "relational contracti ng") yields different results as compared to previous findings. Previous st udies find that US auto firms insource complex parts that require investmen ts in specific assets. Absent large differences in production costs, the re sults suggest that transactions costs associated with external suppliers ex ceed transactions costs associated with internal suppliers (e.g. loss of hi gh powered incentives). Using data on 156 sourcing decisions for process to oling (dies) of a new car program we find that under the new relational con tracting regime, transaction cost theory continues to have explanatory powe r for sourcing decisions; however, attributes that favored insourcing in pr evious studies favor outsourcing in this setting. Moreover, more complex su bassemblies are associated with fewer distinct suppliers than expected - ev idence of a tendency to co-locate decision rights to reduce transactions co sts related to system interactions. After controlling for transaction chara cteristics that are associated with the sourcing decision, we find no evide nce that outsourcing is associated with increased ex post opportunism by th e firm (e.g. agreement about contract completion); however, outsourced part s are submitted by suppliers for evaluation significantly later than insour ced parts (e.g. delivery holdup). (C) 2000 Elsevier Science Ltd. All rights reserved.