Unverifiable quality in subassemblies drives firms to keep assembly work in-house

Evidence

Assembly subcontracting poses a further hazard of the fly-by-night kind through private information on quality. In the case of individual component production, quality can be readily controlled. The client firm is as technically knowledgeable as the subcontractor. As a rule individual components are inspected on delivery and payment is made only after ascertaining that they meet the stipulated standards. In the case of subassemblies or entire machine assemblies, however, it is impossible to check the individual components, and problems due to poor workmanship may appear some time after the machine has been sold to the final customer. According to the client firms, it is primarily this problem of quality assurance which discourages them from resorting to assembly subcontracting on a regular basis. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2582

Categorization

• XREF: Classic information-asymmetry/private-information problem (Akerlof-style lemons), and parallels the reader’s observability thesis: when quality cannot be observed, trust-requiring cooperation breaks down.