Working Paper: CEPR ID: DP16653
Authors: Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
Abstract: We study how informal buyer-supplier relationships in the German automotive industry affect procurement. Using unique data from a survey focusing on these, we show that more trust, the belief that the trading partner acts to maintain the mutual relationship, is associated with both higher quality of the automotive parts and more competition among suppliers. Yet both effects hold only for parts involving unsophisticated technology, not when technology is sophisticated. We rationalize these findings within a relational contracting model that critically focuses on changes in the bargaining power, due to differences in the costs of switching suppliers.
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 |
|---|---|
| Higher mutual trust between a supplier and a buyer (L14) | Lower incidence of quality problems (L15) |
| Higher mutual trust between a supplier and a buyer (L14) | Increased observable and unobservable investments by suppliers in the quality of parts (L15) |
| Higher trust (Z13) | More suppliers invited by the buyer to compete in development (O36) |
| Higher trust (Z13) | Broader competitive environment for buyers (L19) |
| Trust and competition relationship is significant only for low-tech parts (L14) | Trust influences supplier competition (L14) |