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REGIONAL ECONOMIC ISSUES
Working Paper Series
Lean m anufacturing and the decision to vertically integrate:
som e em pirical evidence from the U.S. autom obile industry
Thomas H. Klier
FEDERAL RESERVE BANK
OF CHICAGO
WP- 1994/1
Lean manufacturing and the decision to
vertically integrate: some empirical evidence
from the U.S. automobile industry
Thomas H. Klier*
Abstract
The introduction of a new manufacturing system provides a unique opportunity
to analyze its effects on the governance structure of vertical relationships. This
paper focuses on the possible effects of lean manufacturing on the decision to
vertically integrate. Transaction cost theory provides the framework for the
analysis. Lean manufacturing is characterized by a high degree of mutual
commitment between up- and downstream firms; this is expected to lead to the
formation of contractual vertical relationships. The analysis utilizes a new data
set obtained directly from U.S. automobile manufacturers. The empirical
results strongly suggest that the arrival of lean manufacturing has implications
for the decision on governance structure.
1. Introduction
Manufacturing has been undergoing a transition from the Fordist system of
mass production to a lean production system which emphasizes quality and
speedy response to market conditions using technologically advanced
equipment and a flexible organization of the production process.1 The
introduction of this new manufacturing paradigm has led to widespread
changes in the organization of production in the U.S. manufacturing sector (see
♦ E c o n o m i s t a t th e F e d e r a l R e s e r v e B a n k o f C h i c a g o . T h is p a p e r w a s d e v e l o p e d f r o m m a t e r ia l o f
m y d is s e r t a t io n a t M i c h ig a n S ta te U n i v e r s it y , E a s t L a n s in g .
K e n n e th B o y e r , S te v e n M a tu sz , an d A n th o n y C rea n e.
I a m g r a te fu l to c o m m itte e m e m b e r s
I w o u l d a ls o li k e t o th a n k T e r e s a D o y l e ,
A n d r e w K r ik e la s , D a n L u r ia , a n d S c o t t M a s t e n a s w e l l a s s e m in a r p a r t ic ip a n t s a t th e U n i v e r s it y
o f N o rth T e x a s a n d L a k e F o rest C o lle g e .
F in a lly , I w o u l d lik e to th a n k n u m e r o u s e x e c u t i v e s a t
C h r y s le r , F o r d , a n d G M , e s p e c i a l l y G o r d o n L a m p a r te r , A1 B y e r le , a n d W a d e D e a l, f o r t h e ir
p a r t ic ip a t io n in t h is p r o j e c t a n d f o r p r o v id in g th e d a ta u s e d in t h is s t u d y .
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1
Milgrom and Roberts 1990, Klier 1993). Milgrom and Roberts argue that it
was only "natural to expect the characteristics of the modem manufacturing
firm to be reflected in the way the firm is managed and the way it structures
its relations with customers, employees, and suppliers." (p. 515) Since the
early 1980s, it has become increasingly clear that the ramifications of
introducing a new manufacturing system extend far beyond the shop floor. In
fact, the competitiveness of companies and entire industries can be influenced
by its implementation.2
Analyses of relationships between assembler and supplier companies in a lean
manufacturing environment suggest that they are best characterized as close
working relations. The introduction of lean manufacturing has brought with
it an increase in outsourcing by upstream firms, a switch from multisourcing
to single sourcing, a reduction in the number of suppliers, and longer term
contracts with suppliers.3 The close vertical relationships are necessary in
order to facilitate frequent exchange of information during development and
production and in order to involve suppliers in ongoing product design and
development activities, as well as to encourage them to improve quality control
(Holmes 1986, Aoki 1988, Milgrom and Roberts 1990, and Helper 1991). It
has been suggested that the closer vertical relationships support the use of
contractual arrangements (Aoki 1988, Coase 1988). It is therefore worthwhile
to ask how transaction cost theory can explain the reported effects of lean
manufacturing on the choice of governance structure for vertical relationships.
Coase (1937) introduced the concept of transaction costs in order to explain the
existence of firms in a market economy.4 Williamson (1975, 1985) developed
Coase’s idea into a theory of institutional choice, which suggests that
transaction costs are minimized by matching governance structures with certain
characteristics of transactions. Empirical work which tests Williamson’s theory
consistently finds that vertical relationships characterized by assets highly
specific to that relationship are unlikely to be organized in the form of short
term market relationships. In these cases either long-term contractual relations
or vertical integration are chosen as structures to govern the vertical
relationship. Relationship-specific human capital has been shown to exert the
strongest influence on the occurrence of vertical integration. This has been
firmly established for both forward and backward integration, using
manufacturing as well as non-manufacturing data (see Monteverde and Teece
1982a and 1982b; Anderson and Schmittlein 1984; Masten 1984; Spiller 1985;
Joskow 1985; John and Weitz 1988; Masten et al. 1989 and 1991; and
Liebermann 1991). However, the transaction cost theory literature has so far
not considered the effects of the lean manufacturing system on the structure
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of vertical relationships.5 Lean manufacturing was pioneered and successfully
applied by Japanese producers. It has since been adopted by many American
manufacturers in order to be able to compete effectively (see for example
Helper 1991, Bechter and Stanley 1992).6
This study focuses on the ramifications of the introduction of lean
manufacturing for the decision to vertically integrate. Does lean manufacturing
affect the comparative assessment of markets and hierarchies, and thereby the
choice of governance structure? Based on the framework of transaction cost
theory, it explores a possible explanation of the increased usage of contractual
arrangements in a lean manufacturing environment. To illustrate, examples
from the U.S. auto industry will be used throughout the paper because it
introduced the new manufacturing system rather quickly and greatly influenced
the way many other businesses organize their factories.
The paper is organized as follows: section two develops the theoretical
framework and the hypothesis regarding the effects of the introduction of lean
manufacturing on the determinants of vertical integration. The model is
developed in section three. Data set and variables are described in section
four. The empirical results are presented in section five, a summary and
conclusions follow.
2. Theoretical framework
a.
T r a n s a c t io n c o s t th e o ry a n d v e r t ic a l in te g r a t io n
Transaction cost theory postulates that contracting is not a costless activity.
With regard to procurement decisions it relates individual ’make-or-buy’
choices to certain characteristics of the transaction. It argues that the key
determinant of governance structure is the extent to which production requires
large investments in durable, relationship-specific assets. Investments in these
transaction-specific assets leave only imperfect market exchange alternatives
to the parties of a transaction since assets which are specialized to a transaction
represent a lower value in other uses; i.e. they create a stream of quasi-rents.7
To the extent that these quasi-rents are appropriable, they might become a
matter of contention in a bilateral relationship. The more specialized the
assets, the greater the incentive for agents to attempt to influence the terms of
trade through bargaining or other rent-seeking activities once the investments
are in place. The possibility of post-contractual opportunism creates what the
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literature refers to as the hold-up problem (see Goldberg 1976): one party can
capture all of the appropriable quasi-rents from the other party by threatening
to dissolve the relationship unless price concessions are forthcoming.
Since it is prohibitively costly to write long-term contracts which specify all
obligations under all possible contingencies, the possibility of post-contractual
opportunism is argued to influence the choice of governance structure.
Transaction cost theory posits that, in the presence of transaction-specific
investments, governance structures will emerge ex ante to reduce the incentives
of either the buyer or the seller to behave opportunistically ex post, i.e. after
the governance structure is chosen.8 Specifically, governance structures are
argued to be matched with asset specificity characteristics of transactions in a
cost-minimizing fashion.
Two general types of governance structures are offered as solutions to the
condition of asset specificity: vertical integration and contracts. They differ
in terms of their ability to accommodate asset specificity conditions; the
desirability of vertical integration is argued to be higher, the higher the cost of
conducting transactions via market-based relationships.
The role of contracts is to prevent opportunism by stipulating acceptable
behavior at the beginning of a relationship between two parties. Their use
allows for market incentives to work in that relationship. A particular
relationship between two firms is limited by the length of the contract.
Consequently, it is possible for the downstream company to switch supplier
companies once the contract expires. But contracts incur expenses in both
specification and enforcement that limit their usefulness. Efforts to suppress
opportunism contractually are limited by the costs of writing and enforcing
explicit contractual agreements. Vertical integration, on the other hand,
offers the possibility of making decisions in an adaptive, sequential manner.
This reduces the need to enumerate all possible contingencies at the outset of
the relationship. But these benefits of integration are limited by the loss of
high-powered incentives and the increasing costs of managerial oversight as
firms incorporate more activities. Accordingly, organization within the firm
necessitates greater investments in monitoring and administration.
Transaction cost theory distinguishes three main forms of specific assets:
specific human capital, specific physical capital, and site-specific capital.
Specific human capital arises due to investment in and accumulation of
education and skills that are specific to a particular relationship, embodied for
example in accountants, designers, and engineers needed to produce a
particular product. Specific physical capital includes buildings and machines
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that can be used for one customer or a small number of customers only.
Suppose that in order to produce a particular part for one buyer, specific dies
are needed for a machine press to turn out that part; in that case the dies
represent specific physical capital. Finally, if successive stages of a production
process are located adjacent to each other, they involve site-specific capital.
Obviously, in order for location to lead to specificity, some transportation costs
are required.
These three asset specificity conditions are argued to influence the choice of
governance structure in the following way. If a firm uses outside contractors
rather than its own employees, opportunistic behavior is possible. For
example, a contractor who knows that a firm is facing a deadline may demand
more money or lower the quality of its output to meet its own deadline. Since
quasi-rents accrue to transaction-specific human capital , the cost of transacting
across the market increases and makes it necessary to integrate production
within the firm (Williamson 1985, p.96). Accordingly, an increase in the
degree of human asset specificity is expected to lead to an increase in vertical
integration.
The presence of specific ph ysical capital can also lead to post-contractual
opportunistic behavior, for example, if a company that produces stampings
owns not only the machine press but also the dies needed to produce a
particular part. That company might decide to raise the price of its product
because its customer may find it prohibitively expensive to switch suppliers in
the short run. If the relationship between these two companies is dominated
by specific physical assets, ownership of these assets can eliminate the hold-up
problem by internalizing the quasi-rents, the object of opportunistic behavior.
However, that does not require production itself to be integrated; the buyer
may own the dies and have stamping companies bid for provision of the
machine press services. Such a case of ownership of a specific physical asset
in combination with a contractual relationship is referred to as quasi-integration
(or quasi-vertical integration). A higher degree of physical asset specificity is
not expected to lead to an increase in vertical integration, but to an increase
in quasi-integration.
Investments in immobile site-specific assets can also give rise to opportunistic
behavior. For example, if the downstream company stops demanding the input
provided by the closely located supplier, that company might have to relocate
in order to find alternative business; but that can be extremely costly in the
case of long-lived and immobile assets. Once such assets are located, the
parties operate in a bilateral exchange relationship for the useful life of the
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assets. Hence, an increase in site specificity is expected to favor vertical
integration over autonomous contracting since it reduces potential for
opportunistic behavior (Williamson 1985, p. 95).
One also needs to pay attention to the frequency with which transactions occur.
The costs of setting up a vertically integrated organization, i.e. investments in
monitoring and administration, suggest the following relationship. As a
transaction recurs more frequently, integration is expected to become more
desirable since potential losses from not integrating, i.e. losses from
opportunism and the relative disadvantage of being able to make decisions
adaptively, outweigh the costs of integration (Anderson and Schmittlein 1984,
p. 388; Williamson 1985, p. 60). Frequency of transaction is therefore a
relevant dimension in determining the choice of governance structure; an
increase in the frequency is expected to lead to an increase in the probability
of vertical integration.
b.
H y p o t h e s is : e ffe c t o f m u t u a l c o m m itm e n t
With the introduction of the lean manufacturing paradigm in the United States,
the relationships between assemblers and supplier companies have begun to
change. This paper argues that the introduction of lean manufacturing is able
to reduce the propensity for opportunistic behavior by increasing the extent of
mutual commitment present in vertical relationships.
Compared to Fordist manufacturing, lean manufacturing is characterized by a
relatively high level of underlying mutual commitment between up- and
downstream firms; it becomes visible with an increase in the degree of
communication and interaction between manufacturers and suppliers, resulting
in more closely-knit relationships.
Both parties undertake credible
commitments in support of their relationship and in order to promote exchange
(Williamson 1983, p. 519). The supplier company changes the organization
of its production such that it can produce "just-in-time", otherwise it will end
up carrying large amounts of inventory for the downstream customer. In
addition, it takes on responsibility for quality control and, often, research and
development, both activities that were traditionally undertaken by the auto
assembler. Accordingly, suppliers invest in quality control training and
equipment, and maintain their own product-design staff. Furthermore,
suppliers are found to locate (or relocate) their operations close to the
downstream customer. The assembler, in turn, uses single suppliers for a
particular automobile platform as opposed to dealing with multiple suppliers
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per part. In addition, it commits to longer-term relations through both longerterm contracts and the extension of informal contract-renewal promises, given
continuous quality improvement by the supplier.9
Successfully implemented lean manufacturing sourcing relationships enable
both parties to benefit from the incentive advantages of contracts. The
assembler company is able to save monitoring costs and to cut down on
inventory; the supplier company is no longer exposed to annual contract
bidding in its longer-term relationship with the auto assembler. This was not
the case in a Fordist manufacturing environment: short-term, arms-length
relationships with multiple suppliers generally were not designed to reward
commitment. There was no incentive for sourcing relationships to continue
over time.
The central question of this paper is how the introduction of mutual
commitment affects the decision to vertically integrate. Anecdotal evidence
seems to suggest it reduces the transaction cost of contractual arrangements.
How can we explain its impact within the framework of transaction cost
theory?
The introduction of lean manufacturing brought with it a relatively high level
of mutual commitment in sourcing relationships.10 It has the effect of
protecting contracts against expropriation. The presence of high degrees of
mutual commitment strengthens the ability to enforce contractual agreements
by making hold-up threats less credible: mutual commitment affects the
symmetry of the hold-up threat. The above-mentioned investments in the
vertical relationship by assembler and supplier, such as investment in R&D and
quality control as well as the use of longer-term contracts and the extension of
contract renewal promises, make a potential bargaining situation over the
appropriable quasi-rents more symmetric.11 That is different from Fordist
supplier relationships, where bargaining leverage tended to be asymmetrically
distributed in favor of the automobile assembler. To put it differently, a
mutual reliance relation strengthens the mechanism of implicit contract
enforcement. A so-called implicit contractual agreement is not enforced
through a third agency (ultimately the presence of government) but merely by
the threat of termination of the transactional relationship and communication
of the contractual failure to the market place. Coase (1988, p. 44) points out
that the implementation of long-term contracts is commonly accompanied by
informal arrangements not governed by contract. A defrauding firm may
realize immediate gains by breaking the contract, but if it can be identified, it
will lose future business. Longer term vertical relationships, typical for lean
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manufacturing, reinforce the effectiveness of contractual agreements by
increasing the present discounted value of the quasi-rent stream attributable to
a particular vertical relationship relative to the one-time gain from severing that
relationship by breaking the contract.
From the theory outlined above it follows that the introduction of lean
manufacturing can effectively reduce the propensity for opportunistic behavior
by increasing the extent of mutual commitment present in vertical
relationships. Therefore, the increase in mutual commitment is expected to
result in a decrease in the probability of vertical integration.
3. Model
The objective of this paper is to assess how the introduction of lean
manufacturing affects the decision to vertically integrate. According to
transaction cost theory, governance structures are chosen in order to minimize
transaction costs. Transaction costs are assumed to be determined in the
following way:
Tj = a + pXj + e,
(1)
where i denotes a transaction, X represents a vector of independent variables,
s, ~ N(0,1), and 8j and 8j (i*j) are independent.12 The actual transaction costs
[TJ, however, are unobserved. Instead, one can observe the governance
structure chosen [YJ. A binomial probit model distinguishes two different
categories in the dependent variable; in the case at hand they are "vertical
integration" and "contractual relation".13 The two categories of governance
structure are related to the unobserved variable, i.e. the level of transaction
costs, in the following way:
Yj = 1 [vertical integration] if Tl vcrtical in,cgratlor, < Tlconlract
Yj
(2)
0 [contractual relation] if Tj.vertical integration ~ fi.contract
Accordingly, the binomial qualitative choice model estimates
Yj = a + pX{+ 8,
(3)
The parameters of the independent variables can be estimated by the maximum
likelihood method using the loglikelihood function:
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71
71
L = £ r , log F(a + fi X) + £ ( 1 - 7 , ) lo g [l - F (a + pX,)]
/-i
/-i
(4)
where F represents the cumulative distribution function of the standard normal
distribution. The binomial probit model estimates the probability of vertical
integration as
Prob (Yj = 1) = Prob (Tjvcrticll mtcgratl0n > Tlcontract) = <D(Y,)
(5)
where <t> denotes the standard normal distribution.14
In interpreting the estimation results it is important to note that the estimated
coefficients in a qualitative choice model are not meaningful by themselves.
Hence the marginal effects of the independent variables on the choice of
governance structure are calculated and analyzed.15
The binomial probit model to be estimated has the following general form:
Prob(vertical integration) = a + p, human asset specificity + P2physical asset
specificity + p3 site specificity + p4 mutual
commitment + p5 frequency + E y( control
variables + e
As indicated above, transaction cost theory predicts that an increase in the
degree of human asset specificity has a positive effect on the probability of
vertical integration; P, is expected to be > 0. Potential hold-up problems in the
presence of specific ph ysical assets can be attenuated by internalizing the
associated quasi-rents through ownership of the specific assets rather than
through the integration of production. Hence physical asset specificity is
expected to lead to quasi-integration. In the binomial probit model that case
is included in the category "contractual relation", therefore p2 is expected to be
< 0.16 The introduction of lean manufacturing is expected to change the
standard transaction cost theory argument of a positive effect of the degree of
site specificity on the incidence of vertical integration. Today, geographically
close location of assembler and supplier operations is frequently a sign of
mutual commitment between the two firms. Consequently, one could argue
that site specificity would decrease the probability of vertical integration.
However, since relocation is a long-term decision it is unlikely for it to have
occurred to a large extent within the last decade. Site specificity is therefore
expected to have no significant effect on the choice of governance structure;
P3 is expected to be < 0. The degree of mutual commitment present in a
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vertical relationship is argued to curb the potential for opportunistic behavior.
An increase in mutual commitment is therefore expected to reduce the
probability of vertical integration, |}4 < 0. An increase in the freq u en cy o f
transaction, on the other hand, is expected to reduce the costs of vertical
integration relative to contractual arrangements, ps > 0. Transactions
conducted more frequently will be governed within the firm, i.e. the probability
of vertical integration increases.
4. Data and variables
The empirical analysis is based on a set of cross-section data obtained directly
from U.S. automobile manufacturers between September 1991 and March 1992
via questionnaire.17 Once contacts were established with each of the car
assemblers, data were collected for one particular size of car, compact cars, in
order to control for possible scale effects.
The compact car platforms in the sample correspond to the following car
models:18 General Motors assembles the N-car at its Lansing, Michigan, plant.
This platform is the basis for the Pontiac Grand Am, the Buick Skylark, and
the Oldsmobile Achieva. Ford assembles its Tempo/Topaz cars at two
locations: Kansas City, Missouri, and Oakville, Ontario. Chrysler assembles
its two A-body cars, the Dodge Spirit and the Plymouth Acclaim, at its
Newark, Delaware, plant.
The questionnaire was designed to collect information on a sample of parts and
components that constitute an automobile.19 The sample used consists of 30
automotive parts; its size was chosen to restrict the questionnaire to
manageable size. The 30 parts in the sample were selected in order to
represent the 12 subsystems as well as a range of asset specificity
characteristics (see Appendix).20 The decision to focus on parts (vs.
subassemblies) eliminates possible bias toward in-house production that exists
for data at the more aggregate level of subassemblies (see Luria 1990b).21
The data set consists of 89 observations; 41 parts (46.1 %) represent
contractual relationships and 48 parts (53.9 %) fall in the category vertical
integration (see Table 1).
The degree of mutual commitment cannot be observed directly. Proxied by
the variable DEVELOP, it is measured as the number of years during which
assembler and supplier work together on producing a part prior to the start of
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production.22 Before a part goes into production, supplier and assembler need
to come to an understanding about its technical features, quality standards,
price, delivery schedules, etc. In order to work out an answer to the relevant
questions, a significant amount of cooperation between assembler and supplier
takes place in lean manufacturing relationships. For example, Chrysler Corp.’s
new JA platform is supposed to go into production in 1995. Yet by 1992
every major system of that platform was already sourced (1992 Ward’s
Automotive Yearbook, p. 53). Often the supplier has to contribute its own
R&D efforts to fill in the specifics of production and design of a so-called
’black box’ part. It is argued that the resulting coordination efforts signal the
extent of underlying mutual commitment to a vertical relationship. The more
time is spent on pre-production communication between assembler and
supplier, the larger is the extent of mutual commitment to that relationship.
The frequency of transactions between assembler and supplier is measured
by the variable DELIVERY INTERVAL. It measures the time interval
between deliveries of a part from the supplier to the assembler’s consuming
plant according to the following six-point scale: delivery every 0-2 hrs [1];
every 2-8 hrs [2]; every 8-24 hrs [3]; every 24-72 hrs [4]; every 72 hrs - 1
week [5]; longer than one week [6]; shorter intervals represent a higher
frequency of transaction.23
The degree of human asset specificity is also not directly observable.
Following Monteverde and Teece (1982a) and Masten et al. (1989), this
variable is measured as the engineering effort, i.e. engineering cost, that went
into the development of a part. The larger the engineering effort, the greater
the expected magnitude of appropriable quasi-rents. Since data on actual
engineering costs are of a proprietary nature, an engineering cost rating, based
on a five-point scale, is used instead: [1] represents low and [5] high
engineering effort.
As in Masten et al. (1989), the degree of physical asset specificity is
measured by the extent to which the physical assets used to manufacture a
given part are specific to a particular automobile manufacturer. This variable
is also measured in terms of a five-point scale: [1] indicates a low and [5] a
high degree of physical asset specificity.
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Table 1
Means and standard deviations,* vertical integration data
CATEGORY OF THE DEPENDENT VARIABLE
INDEPENDENT
VARIABLES
Contractual
relation
Vertical
ENTIRE
integration
SAMPLE
Import
0.15
(0.36)
0.02
(0.14)
0.08
(0.27)
Generic
0.46
(0.50)
0.25
(0.44)
0.35
(0.45)
Human asset
specificity3
2.34
(1.11)
3.23
(1-02)
2.82
(1.14)
Physical asset
specificity3
2.10
(1.04)
2.75
(0.89)
2.45
(1-01)
Delivery Interval3
3.66
(1.33)
3.15
(0.74)
3.38
(1.08)
Distance3
3.02
(1.19)
2.73
(1.01)
2.87
(1-10)
Develop3
2.61
(0.56)
2.74
(0.72)
2.68
(0.65)
41
48
89
Number of
observations
* Standard deviation in parentheses.
aVariables are based on ordinal rankings of each part in the sample relative to the others;
the means refer to the scales of the variables as defined in the text.
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Table 2
Correlation matrix (89 observations)
Human
asset sp.
Physical Distance Delivery Generic
asset sp.
Interval
Import
Develop
Human asset
specificity
Physical asset
specificity
.57
-
Distance
-.12
-.13
--
Delivery
Internal
-.09
-.07
.58
-
Generic
-.32
-.26
-.04
-.17
--
Import
-.06
.08
.53
.25
-.38
--
.35
.27
-.14
-.11
-.17
-.11
Develop
This study proxies site specificity by the actual distance [DISTANCE] between
the supplier plant and the consuming plant of the auto assembler.24 A smaller
distance corresponds to a higher degree of site specificity. It is measured in
road miles on a five-point scale. The five categories correspond to the
following distances: 0-50 miles [1], 51-300 miles [2], 301-550 miles [3], 551 800 miles [4], and greater than 800 miles [5].25
In addition, the sample includes a set of control variables: In order to
eliminate a possible spurious correlation between imports and the degree of site
specificity an IMPORT dummy was included; it is set to one if a particular
part is imported. The data set contains three dummy variables that indicate the
auto manufacturer [FORD, GM and CHRYSLER]. Two of these dummies are
included as right-hand side variables in the estimated models; they are
expected to pick up existing differences in the scaling of the qualitative
variables as well as differences in corporate strategy. Some auto parts are not
specific to a particular automobile manufacturer or a particular automobile.
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For these components market relationships are expected to operate quite well
(see Monteverde 1981, p.106). Therefore a GENERIC dummy variable is
included to indicate the parts that are not attractive to integration because they
are common across auto manufacturers. The variable is set to one if a part is
not specific to a particular auto manufacturer (see Appendix).
5. Results
Table 3 reports the results for two specifications of the binomial probit
model.26 The %2-tests indicate that the vector of independent variables is
highly significant. The explanatory power of a qualitative choice model can
be calculated by the so-called R2-analogue. The marginal effects of the
independent variables on the decision to vertically integrate are reported in
Table 3 below the standard deviations. They are evaluated at the mean of all
the independent variables. For example, specification 2 reports that, ceteris
paribus, a 1 point increase in the degree of human asset specificity at its mean
would increase the probability of vertical integration by .17.27 An evaluation
of the probit model at the means of the independent variables renders 0.52 and
0.43 as the probabilities of vertical integration for specification 1 and 2,
respectively. I attribute the relatively large partials for the IMPORT dummy
to the skewedness of that variable; the reported results remain virtually
unchanged when the seven observations relating to the imported parts are
dropped.
Both the degree of human asset specificity and the degree of mutual
commitment as measured by DEVELOP are consistently significant in
explaining the occurrence of vertical integration. The condition of human asset
specificity significantly increases the incidence of vertical integration.
Interestingly, the marginal effect of the degree of human asset specificity
corresponds almost exactly to the finding in Monteverde and Teece (1982a).28
Their analysis, however, was performed with data that were collected prior to
the introduction of lean manufacturing to North America. This strongly
suggests that the introduction of lean manufacturing has not altered the way in
which human asset specificity influences the choice of governance structure.
As expected, an increase in DEVELOP, i.e. in the length of pre-production
interaction between assembler and supplier, leads to a significant decrease in
the probability of vertical integration. These two effects are robust across
specifications. Specification 1 provides evidence for a reversal of the effect
of site specificity on the probability of vertical integration. A decrease in the
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January- 1994, WP-1994-1
14
distance between supplying and consuming plant, i.e. an increase in the degree
of site specificity, leads to a reduction in the probability of vertical integration.
DELIVERY INTERVAL measures the frequency of transactions between the
parties. An increase in the number of interactions was argued to increase the
probability of vertical integration. Specification 1 provides strong evidence for
that influence. However, in specification 2 a significant nonlinear effect of
DELIVERY INTERVAL on the probability of vertical integration is found to
exist.29 This is shown in Figure 1; it plots the estimated quadratic relationship
for DELIVERY INTERVAL for the scale of that variable. Starting with a low
frequency of transactions, which is represented by the value 6 - a delivery
interval of longer than one week - and moving to higher frequencies, the
probability of vertical integration increases as expected. However, as the
DELIVERY INTERVAL falls to less than 8-24 hours (category 3), this
relationship breaks off: further increases in frequency no longer increase the
probability of vertical integration. Multiple daily deliveries are generally
reported to be one of the stylized facts of lean manufacturing.30 Even though
it is argued that an increase in the frequency of delivery is necessary but not
sufficient to indicate a change in the assembler-supplier relationship (see
Helper 1991), the results of specification 2 seem to indicate that for very high
frequencies of transaction the variable DELIVERY INTERVAL captures the
mutual commitment between assembler and supplier present during production
relationships.31 Accordingly, the break in the standard linear relationship
between frequency of transaction and probability of vertical integration can be
explained by the presence of mutual commitment which works as a restraint
on opportunistic behavior. This restraint becomes effective in the case of
multiple daily deliveries.
To sum up, the results of the binomial probit model support the hypothesis of
an increase in contractual vertical relationships brought on by the introduction
of lean manufacturing. The importance of the degree of mutual commitment
as a determinant of governance structure is established. Its proxy variable,
DEVELOP, is found to be negatively related to the probability of vertical
integration. Longer term, mutual reliance relationships between assembler and
supplier, characteristic of lean manufacturing, result in a lower probability of
vertical integration. The influence of the degree of human asset specificity on
the choice of governance structure is found to be unaffected by the
introduction of lean manufacturing. In fact, the marginal effect of that variable
does not differ statistically from that established in previous related studies.
As expected, evidence cannot be established for a positive effect of site
specificity on the probability of vertical integration.
FRB CHICAGO Working Paper
January 1994, WP-1994-1
15
Table 3
Binomial probit analysis: probability of vertical integration
Specification 1
Constant
1.20
(1.33)
-3.81
(2.16)
Import
-2.58**
(1.00)
(-1.03)
-2.56**
(1.08)
(-1.01)
Generic
-0.97**
(0.40)
(-0.38)
-0.83*
(0.42)
(-0.33)
Human asset
specificity
0.39**
(0.18)
(0.16)
0.44**
(0.20)
(0.17)
Physical asset
specificity
0.28
(0.22)
(0.11)
0.23
(0.25)
(0.09)
Distance
0.44*
(0.25)
(0.18)
0.29
(0.27)
(0.11)
FRB CHICAGO Working Paper
January 1994, WP-1994-1
Specification 2
Table 3 (continued)
Binomial probit analysis: probability of vertical integration
Specification 1
Specification 2
Develop
-0.51*
(0.31)
(-0.20)
-0.67*
(0.34)
(-0.26)
Delivery Interval
-0.58***
(0.21)
(-0.23)
3.26**
(1.59)
(-0.29)3
(Delivery Interval)2
Log-likelihood
x2
df=
(vs controls)
df=
X2
-
-40.24
-0.59**
(0.25)
-35.37
42.34***
9
52.08***
10
17.35***
5
29.18***
6
R2-analogue
0.34
0.42
Values under each coefficient are the standard error and the partial derivative evaluated
at the mean, respectively. Company dummies are not reported.
includes effect of quadratic term.
‘significant at the 90% level; “ significant at the 95% level;
‘ “ significant at the 99% level.
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January> 1994, WP-1994-1
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6. Conclusion
This study focussed on the possible effects of the introduction of the new
manufacturing paradigm on the choice of governance structure. Effects of
manufacturing on the structure of the firm are generally not analyzed by the
industrial organization literature, which is probably related to the low
frequency with which paradigm shifts in manufacturing occur. Yet, the
widespread application of a new manufacturing system raises important
questions about the structure of the manufacturing sector.
The central question of this study was how the introduction of lean
manufacturing affects the decision to vertically integrate. In order to address
it, this study referred to the mechanisms of contract enforcement. The
presence of high degrees of mutual commitment, a characteristic of lean
manufacturing, was shown to strengthen the ability to enforce contractual
agreements by making hold-up threats less credible. In doing so, it increases
the self-enforcing range of contracts. It was proposed that the introduction of
lean manufacturing leads to a change in the relationship between up- and
downstream firms and, as a result, in a relative reduction of the transaction
costs of contractual arrangements.
The results of the binomial probit model show the degree of mutual
commitment to be a statistically significant determinant of governance
structure. Its proxy, DEVELOP, measures the number of years during which
assembler and supplier work together before the actual start of production of
a car model. It indicates the level of mutual commitment sustaining the
longer-term contractual relationships.
This greater degree of mutual
commitment is found to reduce the probability of vertical integration by the
constraints it places on the potential for opportunistic behavior. Lean
manufacturing introduces mutual commitment into vertical relationships to a
degree that is sufficient to curb the potential for opportunistic behavior. This
result is not reconcilable with the maintained null hypothesis of no effect of
the new manufacturing system on the choice of governance structure.
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January 1994, WP-1994-1
18
The results presented in this study suggest the following general conclusion:
lean manufacturing influences the choice of governance structure by
introducing mutual commitment into vertical relationships. It serves as a
constraint on the potential for post-contractual opportunism and increases the
probability of contractual arrangements between companies. The traditional
influence of human asset specificity on the choice of governance structure is
unaffected.
That insight has broader implications as the reported effects are not likely to
be restricted to the U.S. automobile industry. It strongly suggests the need to
consider characteristics of the manufacturing system in a theory of vertical
integration. Understanding the structural effects of the new manufacturing
system is key to the ability to interpret evidence as well as to plan the
direction of future research.
This paper adds information towards
understanding the effects of the lean manufacturing system. Its implications
are widespread and reach from issues of regional economic development policy
and firm’s location decisions to questions of plant management and
manufacturing productivity.
FRB CHICAGO Working Paper
January 1994, WP-1994-1
19
Figure 1
The effect of "delivery interval”
FRB CHICAGO Working Paper
January1 1994, WP-1994-1
Appendix
A Stylized Compact Car
F R B C H IC A G O
Subsystem:
Part:
ENGINE
Engine Assembly
Cylinder Block
Crankshaft
Pistons
Connecting Rods
Balance Shafts
Camshafts
Cylinder Head*
Valvetrain Components
Water Pump
Oil Pump/ Lubrication
Intake Manifold*
Exhaust Manifold
Flywheel
Piston Rings*
Other
DRIVETRAIN
Transaxle Assembly
Clutch Assembly
Torque Converter*
Transmission Case*
CV Joint*
Rear Differential
Drive Shafts
Gear Sets*
BODY STRUCTU RE
Cowl, Dash Stampings
Body Exterior*
Bumper Assemblies
Small Stampings
Windshield*
Frame
Weather Stripping*
SEA TS, TRIM
Seat Frames, Mechanicals
Seat Covers* [G]
Instrument Panel
W o r k in g P a p e r
J a n u a r y 1 9 9 4 , W P -1 9 9 4 -1
21
Appendix (continued)
A Stylized Compact Car
Subsystem:
Part:
Interior Finish Trim
Headliner/ Carpeting
Rough Hardware* [G]
Grille Panel
Exterior Trim
Mirrors* [G]
Occupant Restraint* [G]
STEER IN G AND SUSPENSION
Steering Wheel
Steering Column*
Power Steering Pump
Steering Gear*
Front Wheel Knuckle
Suspension Control Arms
Springs
Struts
Shock Absorbers
Stabilizer/ Torsion Bars
Trailing Axle
FU EL DELIVERY
Fuel Tank
Fuel Lines
Fuel Pump
Fuel Injection*
Carburetor
Turbocharger
Engine Control Module*
Gas Cap/ Filler* [G]
ENGINE ELECTRIC A L
Spark Plugs
Engine Wiring Harness*
Distributor/ Coil*
Ignition Module
Starter Motor
Alternator* [G]
Cruise Control
FRB CHICAGO Working Paper
January 1994, WP-1994-1
22
Appendix (continued)
A Stylized Compact Car
Subsystem:
Part:
EXHAUST/ EMISSION CONTROL Exhaust Pipes
Catalytic Converter* [G]
Muffler* [G]
Other Exhaust Parts
BRAKES/ W HEELS/ TIR ES
Caliper Assembly*
Drums
Discs
Shoes and Linings
Master Cylinder
Brake Tubes and Hoses
Wheels* [G]
Hub Caps
Tires
HEATING/ VENTILATING
Condensor
Compressor*
Radiator
Heater Core
Tubing/ Hoses
Engine Fan* [G]
CHASSIS/ ELECTRICAL
Battery* [G]
Main Wiring Harness
Small Electric Motors
Electrical Inst. Controls
Lamps
Audio*
Fuses, Switches
Source: Luria (1990b); Andrea et al. (1988)
* Parts in the sample
[G] Generic part
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January 1994, WP-1994-1
23
Footnotes
'The Fordist system is named after Henry Ford who introduced the use o f interchangeable parts
and the moving assembly line to the manufacturing process. Lean manufacturing is also frequently
referred to as just-in-time manufacturing.
2For example, the remarkable recent success o f Chrysler Co. in terms o f developing cars quickly
and efficiently is reported to be the result o f reorganization efforts that were patterned on
development and production techniques employed by Honda Motor Corp.
3For example, Ford Motor Co. currently contracts with about 1400 supplier companies for about
55% o f the costs o f an automobile. That compares to 2400 supplier companies and 48% o f the
costs in the year 1980. The company plans to reduce its supplier base to 1000 companies by the
year 2000. For the recently introduced CDW27 world car, called the Mondeo in Europe and
scheduled to replace the Tempo/Topaz in the US in the summer o f ’94, 58% o f its parts are single
sourced, the remainder is dual sourced. (Fleming 1993)
‘‘Transaction costs include most costs associated with conducting economic activity other than
actual production costs; e.g. costs o f coordinating interdependent activities, exchange o f
information and o f writing, monitoring, and enforcing contracts.
sThe business strategy literature, notably studies conducted under the guidance o f the International
Motor Vehicle Project at MIT (Womack et al. 1990 and references cited therein) analyzes the
difference between Fordist and lean manufacturing in great detail. However, it focuses on issues
o f competitiveness and corporate strategy rather than on the effects o f a change in the
manufacturing paradigm on the determinants o f vertical integration.
6The recent gains in market share by the Big Three may well be related to strong gains in
manufacturing productivity that occurred during the last few years. In addition to the automotive
industry, applications o f lean manufacturing are reported for consumer and electronic goods, metal
products, aircraft, aerospace, and computer industries (see Hollingsworth 1991).
7Asset specificity refers to a situation where one or both parties to a transaction have made
investments such that the value o f an exchange is greatest when it occurs between these two firms
rather than with other firms (Perry 1989). Quasi-rent is the value o f an asset in excess o f its value
in its next best use (Klein et al. 1978).89
8For example, appropriable quasi-rents exist in specialized assets o f oil refineries, pipelines, and
oil fields. This leads to shared ownership in the pipeline by oil-field owners and refinery owners
to remove the possibility o f a separate owner capturing the rent associated with the pipeline (Klein
et al. 1978).
9For example, in the five years between 1983 and 1988, average written contract length doubled
for sourcing contracts in the U.S. auto industry (Helper 1991).
FRB CHICAGO Working Paper
January> 1994, WP-1994-1
24
l0T h e in c r e a s e o f m u t u a l c o m m i t m e n t in v e r tic a l r e la t io n s h i p s is tr e a te d a s e x o g e n o u s t o th e
g o v e r n a n c e d e c i s i o n o f th e fir m . M u tu a l c o m m i t m e n t i s a c h a r a c te r is t ic o f t h e le a n m a n u f a c t u r in g
s y s t e m a n d a s s u c h a s s u m e d t o b e o u t s i d e t h e s c o p e o f a n a l y s i s o f t h is p a p e r . W i l l i a m s o n ( 1 9 8 3 ,
p .5 2 8 ) r e fe r s t o a " m u tu a l r e lia n c e r e la tio n " w h e r e b o t h th e u p - a n d d o w n s t r e a m c o m p a n y i n v e s t
in r e la t io n s h i p - s p e c i f ic c a p it a l.
S u c h r e la t io n s h i p s a r e c h a r a c te r is t ic f o r le a n m a n u f a c t u r in g .
" M o n t e v e r d e ( 1 9 8 1 , p p . 6 4 - 7 5 ) s h o w s in a s im p le g a m e - t h e o r e t ic m o d e l th a t u n d e r s y m m e t r ic
c o n d i t i o n s a p la y e r a t t e m p t in g to e x p l o i t th e tr a d in g p a r tn e r is n o t a s s u r e d o f b e in g a b le t o m a k e
h i m s e l f u n a m b i g u o u s ly b e t t e r o f f .
H e n c e it is in th e in t e r e s t o f b o t h f ir m s t o f in d s o m e w a y o f
a c h i e v i n g th e c o o p e r a t i v e s o lu t io n w h i c h p r o m is e s e a c h p a r ty a c e r t a in p a y o f f .
" B o th p a r t ie s w i l l
r e a liz e th a t c o v e r t o p p o r t u n is m i s i m p o s s i b le a n d w i l l l i k e l y s e t t le , in s t e a d , in t o m u tu a l c o o p e r a t i o n
w h e r e th e r e e x i s t s s y m m e t r y in b a r g a in in g le v e r a g e ."
,2T h e r e a r e n u m e r o u s m in o r e f f e c t s th a t a re e x c l u d e d fr o m th e a n a ly s is ; e .g . d e s ig n r e q u ir e m e n t s ,
q u a lit y c o n t r o l , p r o d u c t io n a n d t r a n s p o r ta tio n c o s t s , a n d n e g o t ia t i n g s t r e n g t h o f p o t e n t ia l s u p p li e r s
r e la t iv e t o t h o s e o f th e p r o d u c e r . B y th e c e n tr a l lim it th e o r e m t h e s e c o m b in e d e f f e c t s a r e a s s u m e d
to b e n o r m a lly d is tr ib u te d .
,3T h e
ca teg o r y
c o n tra ctu a l
r e la t io n
in c l u d e s
b o th
p u r e ly
co n tr a c tu a l
and
q u a s i-in te g r a te d
r e la t io n s h ip s .
l4It e s t im a t e s th e p r o b a b ilit y o f v e r tic a l in t e g r a t io n s in c e Y ; i s s e t to
1 fo r e v e r y
v e r t i c a ll y
in t e g r a t e d tr a n s a c t io n .
l5T h is is a u s e f u l p r o c e d u r e fo r c o n t in u o u s v a r ia b le s ; th e s c a le d q u a l it a t iv e v a r i a b l e s , h u m a n a s s e t
s p e c i f i c i t y , p h y s i c a l a s s e t s p e c i f i c i t y , d e li v e r y in t e r v a l, a n d d e v e l o p , a r e tr e a te d a s c o n t in u o u s
v a r ia b le s ( s e e M o n t e v e r d e a n d T e e c e 1 9 8 2 a , M a s t e n e t a l. 1 9 8 9 a n d 1 9 9 1 ) .
I6S e e M a s t e n e t a l. 1 9 8 9 .
,7D a ta s o u r c e s w e r e th e U .S . B i g T h r e e : C h r y s le r , F o r d , a n d G e n e r a l M o t o r s .
S a tu r n C o r p o r a t io n
d e c l in e d to p a r t ic ip a t e in th is p r o je c t.
I8’ P l a t f o r m ’ r e fe r s to th e str u c tu r a l u n d e r b o d y o f a ca r; it is a c o n c e p t th a t d e f i n e s v e h i c l e s w it h
c o m m o n w h e e l b a s e a n d o th e r d im e n s io n a l c h a r a c te r is t ic s th a t w o u l d m a k e t h e m r e la t iv e l y s im p le
to p r o d u c e o n a c o m m o n lin e (L u r ia 1 9 9 0 a , p . 1 4 3 ).
'‘'D a ta
w ere
c o lle c te d
at
th e
le v e l
of
th e
in d iv id u a l
car
a s s e m b l e r - s u p p li e r
r e la t io n s h ip .
A c c o r d i n g l y , e a c h d a ta p o in t r e p r e s e n t s a p a r tic u la r a s s e m b l e r - s u p p li e r r e la t io n s h ip . T h a t w a y c a s e s
o f m u lt ip le s o u r c in g a r e r e p r e s e n t e d b y s e p a r a te d a t a p o in ts .
m a x im u m o f f i v e a s s e m b l e r - s u p p li e r r e la t io n s h ip s p e r p a rt.
T h e q u e stio n n a ir e a llo w e d fo r a
D a ta u s e d in p r e v i o u s s t u d ie s d id n o t
a l l o w fo r a d is t in c t io n b e t w e e n d if f e r e n t s u p p lie r s fo r a p a r tic u la r p a rt.
T h e d a ta w e r e
p la t f o r m s .
o b t a in e d
fr o m
In o r d e r t o c h e c k
p u r c h a s in g a n d e n g in e e r in g s t a f f r e s p o n s i b l e
f o r th e r e le v a n t
fo r t h e ir a c c u r a c y , I a r r a n g e d fo r a s c r e e n i n g o f th e r e tu r n e d
q u e s t i o n n a i r e s b y a n in d e p e n d e n t e x p e r t o n th e a u t o m o b i le in d u s tr y . T h e r a t in g s fo r th e v a r i a b l e s
h u m a n a n d p h y s i c a l a s s e t s p e c i f i c i t y a s r e p o r te d in th e q u e s t i o n n a i r e s in d ic a t e a h ig h d e g r e e o f
c o n s i s t e n c y in t h e d a ta ; f o r b o th m e a s u r e s th e c o r r e la t io n o f r a n k in g s r a n g e s b e t w e e n .9 3 a n d .9 8
a c r o ss a u to a s se m b le r .
20I a m in d e b t e d t o D a n L u r ia f o r in v a lu a b le a d v ic e .
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January 1994, WP-1994-1
25
2lLuria (1990b) measures the degree o f in-house production in two different ways: by means o f
a ’value shipped’ variable that gives the car assembler credit for ’make’ as if all o f the parts and
assemblies shipped from its parts plants were added in those plants; and by means o f a ’value
added’ variable that gives the car assembler credit only for the proportion o f value added in its
own parts plants. In both cases he finds the degree o f in-house production to be greater at the
level o f subassemblies than at the level o f parts and components.
22See Helper (1991) on the importance o f measuring characteristics related to the organization o f
production in order to adequately capture the mutual commitment between assembler and supplier.
23Since this scale is inversely related to the frequency o f transactions, p 5 is expected to be < 0.
^Quantitative measures o f location are likely to be influenced by the potential endogeneity o f the
location decision. In order to account for that, a measure similar to the one used by Spiller (1985)
was created. It included information on the location o f the closest potential supplier and was
calculated as the ratio o f distance to the closest supplier and distance to the actual supplier.
However, it was not found to contribute information beyond what DISTANCE already measured.
Alternatively, a qualitative measure o f the "importance" o f close location o f subsequent stages o f
production could have been used (see for example Masten et al. 1989). However, such a proxy
could not distinguish several suppliers for a particular part.
25Since the scale o f DISTANCE is inversely related to the concept o f site specificity, p 3 is
expected to be > 0 .
26The coefficients for the company-dummies are not reported due to confidentiality reasons. The
pattern o f influence on the decision to integrate reported in Table 3 is robust with respect to the
scaling o f the qualitative independent variables; both quadratic and logarithmic transformations o f
these variables were tested.
27The degree o f human asset specificity is measured on a five-point scale; the sample mean is 2.82.
28Monteverde and Teece (1982a) estimated a binomial probit model o f vertical integration with
data from U.S. auto manufacturers. Since Kirk Monteverde kindly provided access to his data,
I was able to calculate the unpublished partial derivative for the human asset specificity variable
(significant at the 95%-level) - it is +.12 - and use it as a benchmark value. However, several
caveats apply to such a comparison. For example, different sampling procedures were used across
studies. Monteverde and Teece left it up to the automobile manufacturers to supply them with
information; in my study 1 sampled information on a given set o f automobile parts across
manufacturers. In addition, each o f the studies probably received its information from a different
set o f respondents at the automobile companies. However, the robustness o f the rankings o f the
qualitative independent variables was established for both studies.
I find no evidence for a statistical difference in the marginal effect o f the degree o f human asset
specificity on the probability to vertically integrate between my own and the results o f Monteverde
and Teece. Their partial derivative was found to lie within two standard deviations from the slope
o f human asset specificity as estimated in my model. This finding is robust across specifications.
The standard deviation was obtained by calculating the asymptotic variance o f the slope o f human
asset specificity.
29A x 2-test on (DELIVERY INTERVAL )2 yields a value o f 9.74; x 299( l) = 6.635.
30See for example Linge (1991).
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3lHelper (1991) reports that supplier companies are able to increase the frequency o f delivery
without changing their production system. However, when a supplier has to deliver very
frequently, e.g. in the case o f seats which are now commonly delivered every hour to the assembly
plant, she will have to make adjustments in her own production operation in order to assure timely
delivery o f defect-free parts (see also section 2b).
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27
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The Machine that
30
W o rk in g P a p e r Series
A series ofresearch studieson regional economic issues relating to the Seventh Federal
Reserve District,and on financial and economic topics.
REGIONAL ECONOM IC ISSUES
Census Content of Bureau ofEconomic
Analysis Input-Output Data
WP-91-2
Philip R. Israilevich, Randall W. Jackson and Jon C o m e r
Calibrating Manufacturing Decline in the Midwest:
Valued Added, Gross State Product, and allPoints Between
WP-91-8
William A. Testa and David D. Weiss
The Midwest Economy: Quantifying Growth and Diversification in the 1980's
WP-91-12
Robert hi. Schnorbus and David D. Weiss
Issues in State Taxation of Banks
WP-91-17
Richard H. Mattoon
Job Right and the Airline Industry: The Economic Impact of Airports
on Chicago and Other Metro Areas
WP-92-1
William A. Testa
Estimating Monthly Regional Value Added by Combining Regional Input
With National Production Data
WP-92-8
Philip R. Israilevich and Kenneth N. Kuttner
Local Impact of Foreign Trade Zone
WP-92-9
David D. Weiss
Trends and Prospects forRural Manufacturing
WP-92-12
William A. Testa
State and Local Government Spending-The Balance
Between Investment and Consumption
WP-92-14
Richard H. Mattoon
Forecasting with Regional Input-Output Tables
WP-92-20
P.R. Israilevich, R. Mahidhara, and G J D . Hewings
1
W ozking paper series continued
A Primer on Global Auto Markets
.Schnorbus
WP-93-1
Industry Approaches toEnvironmental Policy
in the Great Lakes Region
WP-93-8
Paul D. Ballew and Robert H
David R. AUardice,Richard H. Mattoon and William A. Testa
The Midwest Stock Price Index-Leading Indicator
ofRegional Economic Activity
WP-93-9
William A. Strauss
Lean manufacturing and the decision to vertically integrate
some empirical evidence from theU.S. automobile industry
WP-94-1
Tho m a s H. Klier
ISSUES IN FIN A N CIA L REGULATION
Capital Banking: Past, Present and Future
WP-91-10
George G. Kaufman
The Diminishing Role of Commercial Banking in theU.S.
WP-91-11
George G. Kaufman
Optimal Contingent Bank Liquidation Under Moral Hazard
WP-91-13
Charles W. Calomiris,Charles M, Kahn, and Stefan Krasa
Scale Elasticity and Efficiency For U.S. Banks
WP-91-15
Douglas D. Evanoff and Philip Israilevich
An Empirical Test of the Incentive Effects of Deposit Insurance:
The Case ofJunk Bonds at Savings and Loan Associations
WP-91-18
Elijah Brewer III and T homas Mondschean
Incentive Conflict in Deposit-Institution Regulation: Evidence from Australia
WP-92-5
E d w a r d J. Ka n e and George G. Kaufman
Capital Adequacy and the Growth ofU.S. Banks
WP-92-11
Herbert Baer and John McElravey
Bank Contagion: Theory and Evidence
WP-92-13
George G. K a ufman
2
W orking paper series continued
Trading Activity, Progarm Trading and the Volatility of Stock Returns
W P-92-16
James T. Moser
Preferred Sources of Market Discipline: Depositors vs.
Subordinated Debt Holders
WP-92-21
Douglas D. Evanoff
An Investigation ofReturns Conditional
on Trading Performance
WP-92-24
James T. Moser and Jacky C. So
The Effect of Capital on Portfolio Risk atLife Insurance Companies
WP-92-29
Elijah Brewer III, Thomas H. Mondschean, and Philip E. Strahan
A Framework forEstimating the Value and
InterestRate Risk ofRetail Bank Deposits
WP-92-30
David E. Hutchison, George G. Pennacchi
Capital Shocks and Bank Growth-1973 to 1991
WP-92-31
Herbert L. Baer and John N. McElravey
The Impact of S&L Failures and Regulatory Changes
on the CD Market 1987-1991
WP-92-33
Elijah Brewer and Thomas H. Mondschean
Junk Bond Holdings, Premium Tax Offsets, and Risk
Exposure atLife Insurance Companies
WP-93-3
Elijah Brewer III and Thomas H. Mondschean
Stock Margins and the Conditional Probability ofPrice Reversals
WP-93-5
Paul K ofman and James T. Moser
IsThere Lif(f)e After DTB?
Competitive Aspects ofCross Listed Futures
Contracts on Synchronous Markets
WP-93-11
Paul Kofman, Tony B o u w m a n and James T. Moser
Opportunity Cost and Prudentiality: A RepresentativeAgent Model of Futures Clearinghouse Behavior
WP-93-18
Herbert L. Baer, Virginia G. France and James T. Moser
3
W orking paper series continued
The Ownership Structure ofJapanese Financial Institutions
WP-93-19
Hesna Genay
M ACRO EC O N O M IC ISSUES
Structural Unemployment and Public Policy in
Interwar Britian: A Review Essay
WP-91-1
Prakash Loungani
A Simple Estimator of Cointegrating Vectors
in Higher Order Integrated Systems
WP-91-3
James H. Stock and M a r k W. Watson
Stochastic Trends and Economic Fluctuations
WP-91-4
Robert G. King, Charles I. Plosser, James H. Stock and M a r k W. Watson
Gross Job Creation, Gross Job Destruction and Employment Reallocation
WP-91-5
Steve J. Davis and John Haltiwanger
The Role ofEnergy in Real Business Cycle Models
WP-91-6
In-Moo Kin and Prakash Loungani
Investment and Market Power
WP-91-7
Paula R. Worthington
Measures ofFit forCalibrated Models
WP-91-9
M a r k W. Watson
Using Noisy Indicators to Measure Potential Output
WP-91-14
Kenneth N. Kuttner
Why Does the Paper-Bill Spread Predict
Real Economic Activity?
WP-91-16
Benjamin H. Friedman, Kenneth N. Kuttner
Market Structure, Technology and the Cyclicality Output
WP-91-19
Bruce Petersen and Steven Strongin
Seasonal Solow Residuals and Christmas: A Case
forLabor Hoarding and Increasing Returns
WP-91-20
R. Anton Braun and Charles L. Evans
4
W orking paper series continued
The Effectof Changes inReserve
Requirements on Investment and GNP
WP-91-21
Prakash Loungani and M a r k Rush
Productivity Shocks and Real Business Cycles
WP-91-22
Charles L. Evans
Seasonality and Equilibrium
Business Cycle Theories
WP-91-23
R. Anton Braun and Charles L. Evans
The Identification of Monetary Policy Disturbances:
Explaining the Liquidity Puzzle
W P-91-24
Steven Strongin
R & D and Internal Finance: A Panel Study of Small
Firms in High-Tech Industries
WP-91-25
Charles P. Himmelberg and Bruce C. Petersen
Sticky Prices: New Evidence from Retail Catalogs
WP-91-26
Anil K. Kashyap
Internal Net Worth and the Investment Process:
An Application to U.S. Agriculture
WP-91-27
R. Glenn Hubbard and Anil K. Kashyap
An Examination of Change inEnergy Dependence and Efficiency
in the Six Largest Energy Using Countries-1970-1988
W P-92-2
Jack L. Hervey
Does the Federal Reserve Affect Asset Prices?
WP-92-3
Vefa Tarhan
Investment and Market Imperfections in theU.S. Manufacturing Sector
W P-92-4
Paula R. Worthington
Business Cycle Durations and Postwar Stabilization of the U.S. Economy
W P-92-6
M a r k W. Watson
5
W orking pap er series continued
A Procedure forPredicting Recessions with Leading Indicators: Econometric Issues
and Recent Performance
WP-92-7
James H. Stock and M a r k W. Watson
Production and Inventory Control at the General Motors Corporation
During the 1920s and 1930s
WP-92-10
Anil K. Kashyap and David W. Wilcox
Liquidity Effects, Monetary Policy and the Business Cycle
WP-92-15
Lawrence J. Christiano and Martin Eichenbaum
Monetary Policy and External Finance: Interpreting the
Behavior ofFinancial Hows and InterestRate Spreads
WP-92-17
Kenneth N. Kuttner
Testing Long Run Neutrality
WP-92-18
Robert G. King and M a r k W. Watson
A
Policymaker's Guide to Indicators ofEconomic Activity
WP-92-19
Charles Evans ,Steven Strongin, and Francesca Eugeni
Barriers toTrade and Union Wage Dynamics
W P-92-22
Ellen R. Rissman
Wage Growth and Sectoral Shifts: Phillips Curve Redux
WP-92-23
Ellen R. Rissman
Excess Volatility and The Smoothing of InterestRates:
An Application Using Money Announcements
W P-92-25
Steven Strongin
Market Structure, Technology and the Cyclicality ofOutput
W P-92-26
Bruce Petersen and Steven Strongin
The Identification of Monetary Policy Disturbances:
Explaining the Liquidity Puzzle
W P-92-27
Steven Strongin
Earnings Losses and Displaced Workers
WP-92-28
Louis S. Jacobson,Robert J. LaLonde ,and Daniel G. Sullivan
6
W orking paper series continued
Some Empirical Evidence of the Effects on Monetary Policy
Shocks on Exchange Rates
WP-92-32
Martin Eichenbaum and Charles Evans
An Unobserved-Components Model of
Constant-InflationPotential Output
WP-93-2
Kenneth N. Kuttner
Investment, Cash Flow, and Sunk Costs
WP-93-4
Paula R. Worthington
Lessons from the Japanese Main Bank System
forFinancial System Reform inPoland
WP-93-6
Takeo Hoshi, Anil Kashyap, and Gary Loveman
Credit Conditions and the Cyclical Behavior of Inventories
WP-93-7
Anil K. Kashyap,O w e n A. Lamont and Jeremy C. Stein
Labor Productivity During the Great Depression
WP-93-10
Michael D. Bordo and Charles L. Evans
Monetary Policy Shocks and Productivity Measures
in the G-7 Countries
WP-93-12
Charles L. Evans and Fernando Santos
Consumer Confidence and Economic Fluctuations
WP-93-13
John G. Matsusaka and Argia M. Sbordone
Vector Autoregressions and Cointegration
WP-93-14
M a r k W. Watson
Testing for Cointegration When Some of the
Cointegrating Vectors Are Known
W P-93-15
Michael T. K. Horvath and M a r k W. Watson
Technical Change, Diffusion, and Productivity
WP-93-16
Jeffrey R. Campbell
Economic Activity and the Short-Term Credit Markets:
An Analysis ofPrices and Quantities
W P-93-17
Benjamin M. Friedman and Kenneth N. Kuttner
7
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