Information Asymmetries as Antecedents of Opportunism in Buyer-Supplier Relationships: Testing Principal-Agent Theory

Abstract

Purpose: A severe problem in supplier selection refers to moral hazard: suppliers not behaving in the expected way once contracted. Principal-agent theory could provide insights on how to reduce this problem. Because buyer-supplier relationships can be interpreted as principal-agent situations, the application of agency theory should facilitate improved supplier selection. Although theoretically compelling, empirical tests verifying this assumption are not prevalent. Regarding the advancement of theory, this paper tests whether both ex ante and ex post information asymmetries influence moral hazard. In particular, in the context of a globalizing economy with a subsequent increase in information asymmetries as a problem in supplier selection, this conceptual approach may be contributive.Design/methodology/approach: The authors use a set of 87 buyer-supplier relationships to conduct a test, applying a partial least squares model with latent variables. A particularity of the data set is that it contains information on ongoing as well as on discontinued relationships.Findings: The analysis indicated that both ex ante information asymmetries (operationalized by a reputation variable) and ex post asymmetries (operationalized by a monitoring variable) have shown to be significant and strong antecedents explaining the occurrence of moral hazard. Interestingly, and opposed to the common assumption, the length of a relationship and the amount of direct meetings have not revealed any explanatory significance. Buyer dependency hardly showed influence on supplier opportunism.Research limitations/implications: Data were collected from a multitude of buyer-supplier relationships from a single firm in the chemical-pharmaceutical industry. Generalizations to other industries still need to be tested. Socially desirable answering behavior cannot fully be excluded because relationship discontinuation is not a desirable situation. In terms of theory implications, this research adds to the notion that both hidden action and hidden intention can lead to moral hazard.Practical implications: An agency-based analysis can be operationalized with the help of an agency-based supplier classification portfolio. It might be of particular value to firms to discuss those suppliers that scored high in risk of opportunism but did not (yet) reveal any signs of moral hazard. Finally, the strong explanatory power

Determinants of moral hazard in research and development supply relations: Empirical results beyond the agency‐theory explanation

“…Their findings, however, convey a different message, as the authors found the constructs to be unrelated. Steinle et al () came to the same conclusion in their study of buyer–supplier relationships: buyer dependence hardly showed any influence on supplier opportunism.…”

“…Even ex‐post, the buyer firm cannot fully assess the quality of the supplier's intermediate or final knowledge output. It does not know whether the output is the result of the supplier's efforts or whether it is due to exogenous factors (Kloyer, ; Steinle et al, ).…”

“…Moreover, the empirical results concerning the impact of information asymmetries on moral hazard are inconsistent. Whereas Katsikeas et al () concluded that information asymmetries do not necessarily lead to partner opportunism, Steinle et al () and Ting et al () confirmed the opportunism‐increasing effect of unequally distributed information among transaction partners. Finally, no study has explicitly focused on R&D supply relations.…”

“…This attitude may even include tolerating supplier opportunism (Klein et al, ; Wathne & Heide, ; Williamson, ). Because the dependent buyer firm cannot counter supplier misbehavior by threatening the supplier with switching to another market partner, the supplier firm can be expected to care less about the consequences of opportunistic behavior should it become apparent (Steinle et al, ). Therefore, awareness of the buyer firm's vulnerable situation could motivate the supplier firm to exploit the buyer firm's dependence opportunistically.…”

“…However, there is reason to assume the benefits of a refined explanation of opportunism that considers the specific features of a specific exchange situation. According to that view, some empirical studies have previously been conducted (e.g., Anderson (), Carson, Madhok, and Wu (); John (); Katsikeas, Skarmeas, & Bello, ; Lai, Tian, & Huo, ; Liu, Su, Li, & Liu, ; Luo, ; Mysen, Svensson, & Payan, ; Skarmeas, Katsikeas, & Schlegelmilch, ; Steinle, Schiele, & Ernst, ; Ting, Chen, & Bartholomew, ). However, as we will demonstrate, these studies show inconsistent results.…”