Why Choose Ltas: an Empirical Study of Ohio Manufacturer's Contractual Choices Through a Bargaining Lens
Abstract: This paper contributes to recent scholarship regarding Long Term Agreements (LTAs) by providing empirical evidence that suppliers are more likely to undertake the costs of an LTA if the transaction requires significant capital expenditures or the potential for large sunk costs. Through a survey of a random group of 63 Ohio supplier/manufacturers, the paper explores why supplier/manufacturers with a full range of contractual and non-contractual solutions might choose one set of arrangements over others. It then seeks to link its findings to a broader theory of how parties bargain to solve durable problems under conditions of uncertainty, sunk costs and opportunism, while minimizing costs. Although only a small portion (17%) of our sample size indicated that they used LTAs in the majority of their transactions, this group indicated they were more likely to produce customizable goods and have significant capital expenditures. Such a finding is consistent with a model of bargaining in which parties in a transaction seek to achieve their overall goals of wealth maximization while minimizing costs under conditions that include bounded rationality, sunk costs and opportunism.
