Risk sharing in the supplier relations for the Taiwanese automotive industry

This study attempts to develop a supplier's risk sharing contract to gain an understanding of risk sharing for the automotive industry in Taiwan. The existing research has examined revenue-sharing contracts between retailers and manufacturers. However, the study of suppliers’ risk-sharing contracts between manufacturers and suppliers is neglected. This paper first employs a double moral hazard framework to obtain an optimal contract, and then uses the derived model to establish research hypotheses. The empirical analysis shows that manufacturers offer suppliers a type of supplier's risk sharing contract while maintaining long-term relationships with suppliers. The results also support the hypotheses that manufacturers absorb more risk when the suppliers are more uncertainty, more risk aversion and lower moral hazard, and suggest that manufacturers would be willing to absorb more risk as they deepen their involvement in the technological development of suppliers.