Specific Investment and Supplier Vulnerability: Theory and Evidence

Zhiqi Chen and Xiaoqiao Wang ()
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Xiaoqiao Wang: School of Business, Nanjing University

No 16-06, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: Apart from the familiar holdup problem, we investigate another implication of specific investment that has not been examined systematically in the literature. That is, the presence of specific investment can make a supplier vulnerable to large negative shocks to its customer’s business. In a theoretical model, we demonstrate that this vulnerability causes the supplier to under-invest. A higher degree of specificity induces the supplier to invest more, and it leads to a lower mean and higher volatility in the supplier’s profit. Using panel data on over 5000 U.S. firms from 1990 to 2010, our empirical analysis shows the prevalence of the supplier vulnerability problem associated with specific investment.

Keywords: specific investment; holdup problem; supplier vulnerability; profit volatility (search for similar items in EconPapers)
JEL-codes: G32 L14 L24 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2016-04-13
New Economics Papers: this item is included in nep-ind
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Published: Carleton Economic Papers

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