The Effects of Uncertainty and Reputation in Sub-Contracting Networks

Abstract

It is well known that modern production processes usually involve a large number of sub-contractors who each specialize in producing particular components that together form the final good. The efficiency afforded by the specialization, however, also incurs additional uncertainty in the production process, since each firm in the subcontract chain can fail to produce the component it is responsible for and jeopardize the entire production process. I construct a simulation model in which firms arranged on a network optimize their subcontracting decisions based on the local information available to them about their neighboring firms' reputations.