Two Agency Problems in Subcontracting Systems : The Case of Japan’s Content Industry

Abstract

This study explains why a closed vertical cooperation system in Japan works in its assembly industry but not in its content industry using the multitask agency and common agency theories. Both theories attribute this issue in the content industry to inefficiencies in the overall subcontracting system and the asymmetric distribution of benefits. Two characteristics of the content industry further aggravate this problem. First, quality attributes of products in the content industry are difficult to verify, and thus, there are discrepancies between the evaluations of prime contractors and the efforts of subcontractors, leading to a moral hazard type of inefficiency. The unverifiable quality is used as a pretext by prime contractors to ‘hold up’ subcontractors. Second, in cases where subcontractors are common agents serving multiple contractors and technologies are applicable to each contractor in common, an adverse selection type of inefficiency is intensified, and prime contractors tend to squeeze surplus from subcontractors. In fact, most content producers in Japan serve multiple contractors. Given that the literature is yet to thoroughly address these factors, the findings can offer key insights on the topic. They highlight the importance of recognizing the essential features of the abovementioned problems to vitalize Japan’s content industry.