Risk sharing in supplier relations: An agency model for the Italian air-conditioning industry

Abstract

This study of risk sharing in the Italian high precision air conditioning (AC) industry confirms agency theory predictions that buyers absorb risk to a non-negligible degree, and that they absorb more risk (a) the greater the supplier's environmental uncertainty, (b) the more risk averse the supplier, and (c) the less severe the supplier's moral hazard. The analyzed buyers accommodate for unforeseen and uncontracted-for cost fluctuations, which is consistent with relational contract theory. The study clarifies the relationship between risk sharing and the supplier's size, technological capability, financial stability, and cost fluctuation. It also suggests how buyers may adjust their risk-sharing strategy as suppliers grow, develop technological capabilities, and change financial structure. Copyright © 2007 John Wiley & Sons, Ltd.