Ownership Structures in the Auto Industry: A Property Rights Perspective

We present a model of the supply organization problem in the automotive industry that characterizes both ownership of and access to productive assets. Contracting between a manufacturing firm and a parts supplier is modeled using an incomplete contracting framework that synthesizes those of Grossman-Hart (1986) and Rajan-Zingales (1998). Optimal assignment of ownership and access at key milestones in the product development process are analyzed with respect to their incentive effects on noncontractible investment. The merits of this approach are argued using case study evidence from an original five-year study of parts contracting in the automotive industry. By incorporating quantifiable measures of design complexity from the product development literature, this model also lends itself to more refined testing of vertical integration behavior in a wide range of industries.