Information Aggregation, Strategy, and Investment Decision in Buyer-Supplier Relationships

Abstract

This paper examines whether aggregated cost information provided by suppliers to buyers can mitigate the hold-up problem that occurs with idiosyncratic investments. Hold-up implies that, given the opportunity, buyers pursue a self-interested strategy and do not reimburse suppliers for their idiosyncratic investment. In essence, buyers seek to maximize their own trade surplus at the expense of suppliers. However, evidence suggests some firms pursue a fair strategy. With such firms, research suggests that hold-up can be avoided. I propose and provide empirical evidence that the level of aggregation of the supplier-provided cost information (i.e., fine or coarse) will interact with buyer strategy (i.e., self-interested or fair) to affect investment in idiosyncratic assets and trade opportunism. Results show that coarse information leads to an increase in (no change in) self-interested (fair) buyers' offers and in an increase in suppliers' investments. Thus, suppliers are better off when they disclose coarse rather than fine cost information. Findings also suggest that buyers will benefit from requesting coarse instead of fine cost information from suppliers.