University:
Boston University
Course:
CAS EC 323 | Behavioral Economics
Academic year:

2020
Views:

72

Pages:

2
Author:

fabhrachaz000

Appendix Jobber Regulation and Efficiency Contracting The essence of the “efficiency contracting” model is that the increasing possibility of insufficient orders raises the value to contractors of paternalistic work sharing by jobbers and intensifies the “threat” incentives of business failure. Both paternalism and threat incentives encourage contractors to work harder, cut corners on production costs, accommodate their jobbers, and intensify sweatshop pressures on their workers so as to keep contract prices low. The key instrument for stimulating higher effort and lower costs under the efficiency contracting model is the amount of excess capacity that jobbers maintain among their core contractors. The profit maximizing strategy for the jobber is to choose the optimal balance between the marginal gains from higher effort and the marginal efficiency losses from excess capacity among its core contractors. The optimization process is for jobbers maximize profits by adjusting the number of their core contractors (N) and the level of capacity utilization of contractor i (Ui), conditional upon the jobber’s volume of orders (O), the cost function of (MCi) of core contractor i, and the unit price of contracts (P). A simple model of the jobber’s profit function in each time period t is: Max f(Nt, Uit, Ot, MCit, Pt) In a simple model where contractors have identical cost functions and P = MC, the number of core contractors (N) is a function of U for any given level of orders (O). Since jobbers do not produce for stock, contracting depends on the orders a jobber receives. Once a jobber has orders in hand, U becomes the strategic variable of interest in maximizing profits. Assuming a convex profit function, jobbers will select an optimal U* which equalizes the marginal gains from the incentive efficiencies of lowering capacity utilization and the marginal losses from inefficiencies of contractors producing below full capacity (see Graph A-1). If orders are declining over time, the numbers of core contractors attached to each jobber should fall, but more slowly than under the traditional jobber system. Graph A-1 The Jobber Profit Function Profits 0 U* 100% Capacity Utilization Rate 59 In addition, the hierarchical incentives of the jobber system inhibit movements towards specializations that capture district agglomeration economies by delaying the exit of contractors. Not only do jobbers try to maintain excess capacity by allocating orders to contractors that might otherwise leave the industry, but the incentives for cost-cutting in the jobber system often allow contractors that do not draw upon the New York garment district’s agglomeration economies to remain in business. 60

Fashion Clusters and Market Re-design in the 21st Century Appendix

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