The Knot of Contracts: The Corporate Geography of Legacy Costs

Burdensome past commitments are threatening a concentrated group of industries and communities, predominantly in the U.S. Midwest. Beginning with the bankruptcy of Delphi Corporation, this article documents the crisis for “old-economy firms” with significant legacy costs. To understand the root causes of this legacy crisis, the analysis builds on previous research in economic geography and the results of a widely subscribed and unique “expert opinion” survey highlighting the corporate impacts of defined benefit pensions in the private sector. The result is a conceptual framework that describes the corporate geography of legacy costs: the “knot of contracts.” Specifically, the knot of contracts conceptualizes the role of intergenerational commitments in restricting corporate evolution and innovation, while underscoring time as a central component of the nature of the firm. Developing this framework requires linking microeconomic theories of the firm with the institutional aspects of firms’ geographies. While referring to specific cases and proprietary data throughout, the article is principally concerned with understanding legacy costs. In addition, the intent is to uncover managerial and governmental behavior that tightened this knot of contracts and to expose the current managers’ attempts to manage their firms through the adverse affects of the knot of contracts. The explanations in this article serve as a useful bridge between the realities faced by firms and their surrounding communities and the more abstract notions of the firm and competitiveness in the context of globalization.