The transfer of risk taking along the supply chain

We examine two competing predictions regarding the impact of major customer firms’ risk taking on that of their supplier firms. The bargaining power theory holds that when major customers take more risk to enhance their bargaining power and rent extraction ability, suppliers respond by also engaging in more risk taking to improve their bargaining position. In contrast, the precautionary motive argument suggests that suppliers that rely heavily on major customers should reduce their risk exposure when these customers engage in excessive risk taking. We find robust evidence in support of the first prediction that suppliers’ risk taking is positively influenced by that of their major customers. The risk-taking link along the supply chain becomes more pronounced when the two parties have more comparable bargaining positions and when suppliers have greater risk-taking capacities. Overall, our study shows that major customers’ risk-taking behaviors can help predict those of their suppliers.