Keiretsu and relationship-specific investment: A barrier to trade?

Abstract

This article develops a model of informal procurement within Japanese keiretsu so as to consider effects on intermediate-good imports, such as auto parts. Parts-suppliers make relationship-specific investments that benefit the automaker and prices are determined by bargaining after investment has been sunk. Although this investment raises efficiency, it limits the range of imports to less important parts, such as tailpipes, and it is possible that no parts are imported, despite lower foreign costs. Lack of information concerning investment rents combined with counterintuitive responses of imports to changes in output and costs could create unwarranted perceptions of a trade barrier.