Efficiency effects of regulations on unfair subcontracting behaviors

Yonghyeong Yang

KDI Journal of Economic Policy, 2025, vol. 47, issue 3, 89-114

Abstract: This paper investigates the efficiency effects of governing vertical relationships by analyzing the incentives of firms to engage in exclusive contracts. In particular, the analysis focuses on the subcontracting context. When a downstream firm possesses a superior bargaining position, upstream subcontractors do not prefer an exclusive contract, even when it is efficient, as such a contract lowers their bargaining power even further, ultimately leading to lower profits. It can therefore enhance efficiency to encourage upstream firms to engage in an exclusive contract by limiting bargaining power abuses by superior downstream firms. The paper discusses the required flexibility of such a regulation as well as the evaluation of the current regulation based on the analysis.

Keywords: Subcontracting; Efficiency; Hold-up; Bargaining Power; Exclusive Contract (search for similar items in EconPapers)
JEL-codes: L13 L14 L42 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kdijep:330704

DOI: 10.23895/kdijep.2025.47.3.89

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