Boilerplate and Economic Power in Auto Manufacturing Contracts

Abstract:     
This article studies the standard form contracts used by automobile manufacturers to purchase auto parts. It explores how the contracts reflect divisions of bargaining power, asymmetric information, problems of hold-up and renegotiation, and market competition. Based on interviews with representatives of buyers and suppliers, the article also describes the process of drafting the forms, the negotiation over price and other terms in the shadow of these forms, and the opportunities for non-drafters to extract improved terms. Some of the main lessons are: (i) The terms of the contracts and the bidding process prevent ex-post hold-up by suppliers (in contrast to the claims made by Benjamin Klein and others based on the GM/Fisher Body contract); (ii) There is surprisingly little ad-hoc tailoring of terms, even when such tailoring can increase the surplus from the deal; (iii) Internal organization structures are harnessed effectively to secure favorable bargaining outcomes; (iv) There is a significant variation between the standard forms utilized by the big automakers, in some of the most important aspects of the deals. This variation suggests that some of the terms are inefficient.

Number of Pages in PDF File: 49

JEL Classification: A12, K12

working papers series