The Knot of Contracts: The Corporate Geography of Legacy Costs

Abstract

Burdensome past commitments are currently threatening a concentrated group of industries and communities, predominantly in the US Midwest. Beginning with reference to the bankruptcy of Delphi Corporation, this paper documents the crisis for 'old economy firms' with significant legacy costs. In order to understand the root causes of this legacy crisis, the analysis builds on previous economic geography research and the results of a widely subscribed and unique 'expert opinion' survey highlighting the corporate impacts of defined benefit pensions in the private sector. The result is a conceptual framework that describes the corporate geography of legacy costs; the 'knot of contracts'. Specifically, the 'knot of contracts' conceptualizes the role of intergenerational commitments in restricting corporate evolution and innovation, while underscoring 'time' as a central component of the nature of the firm. Developing this framework requires linking microeconomic theories of the firm with the institutional aspects of firms' geographies. While referring to specific cases and proprietary data throughout, this paper is principally concerned with understanding legacy costs. Additionally, the intent is to uncover managerial and governmental behavior that tightened this knot of contracts, and, subsequently, to expose the current managers' attempts at managing their firms through the adverse affects of the knot of contracts. The explanations in this paper serve as a useful bridge between the realities faced by firms and their surrounding communities, and the more abstract notions of the firm and competitiveness in the context of globalization.

A subsequent version of this paper appears in Economic Geography, 84(2).

Keywords: Legacy costs, pensions, defined benifit, competitiveness, the firm