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I.T., Repeated Contracts and the Number of Suppliers

Forthcoming, Management Science

43 Pages Posted: 7 Jul 2010 Last revised: 17 Nov 2012

Sinan Aral

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: August 13, 2012

Abstract

Many theories address how IT affects the number of suppliers and supply chain governance. However, their predictions are at times contradictory and there is relatively little empirical evidence with which to evaluate them. We therefore develop an integrated, multi-period model of the optimal number of suppliers that combines search and coordination theory, transaction cost economics, and incomplete contracts theory, and we assess our theoretical predictions using a large new dataset on the global IT sourcing decisions of 1355 firms in 12 countries. Our empirical results support three key predictions about trust, IT and supply base size. First, investments in coordination IT, which reduce search and coordination costs, are correlated with using more suppliers, while use of vendor-specific IT is associated with fewer suppliers. Second, repeated relationships and trust play a major role in supply chain governance. As firms work with fewer suppliers they also engage in more repeated relationships. At the same time asset specificity and the need to induce relationship-specific investments are correlated not only with fewer suppliers, but also with a larger fraction of repeated relationships. Third, supply chain governance differs in human capital-intensive and physical capital-intensive industries. The correspondence between asset specificity and repetition is strong in physical capital-intensive firms and not significant in human capital-intensive firms, while the correspondence between fewer suppliers and more repeated relationships is strong in human capital-intensive firms but not significant in physical capital-intensive firms. This corroborates the differential implications of human and physical capital for bargaining power, contractual risk and trust in buyer-supplier relationships.

Keywords: Buyer-Supplier Relationships, Optimal Number of Suppliers, Transaction Cost Economics, Incomplete Contracts, Coordination Theory, Search Costs, IT Outsourcing, IT Vendors

Suggested Citation

Aral, Sinan and Bakos, Yannis and Brynjolfsson, Erik, I.T., Repeated Contracts and the Number of Suppliers (August 13, 2012). Forthcoming, Management Science. Available at SSRN: https://ssrn.com/abstract=1635891 or http://dx.doi.org/10.2139/ssrn.1635891

Sinan Aral (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Yannis Bakos

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States
212-998-0841 (Phone)

HOME PAGE: http://www.stern.nyu.edu/~bakos

Erik Brynjolfsson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-313
Cambridge, MA 02142
United States
617-253-4319 (Phone)

HOME PAGE: http://digital.mit.edu/erik

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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