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Relational contracts and supplier turnover in the global economy

Defever, Fabrice, Fischer, Christian and Suedekum, Jens (2015) Relational contracts and supplier turnover in the global economy. CEP Discussion Paper (1375). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency enhancing cooperation’s can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 14 Jan 2016 13:47
Last Modified: 16 Oct 2019 23:27
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/64978

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