Working Paper: CEPR ID: DP13750
Authors: Leonardo Felli; Giacomo Calzolari; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
Abstract: Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality|but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and disappear for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers|but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).
Keywords: relational contracts; holdup; buyer-supplier contracts; bargaining power
JEL Codes: D86; L14; L62; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trust (G21) | Investment (G31) |
| Trust (G21) | Competition (L13) |
| Trust (G21) | Lower Frequencies of Part Failure (L15) |
| Trust (G21) | More Intense Competition (L13) |
| Investment (G31) | Lower Frequencies of Part Failure (L15) |
| Competition (L13) | Investment (G31) |