Working Paper: CEPR ID: DP10784
Authors: Fabrice Defever; Christian Fischer; Jens Südekum
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 cooperations 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.
Keywords: China; Firm Organization; Input Sourcing; Processing Trade; Relational Contracts; Supplier Search
JEL Codes: D23; F23; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| patient firms stop searching for suppliers (L81) | relational contracts (RCs) (L14) |
| match durations (C41) | relational contracts (RCs) (L14) |
| cost dispersion (D39) | match durations (C41) |
| cost dispersion (D39) | relational contracts (RCs) (L14) |