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Relational Contracts and Supplier Turnover in the Global Economy

Fabrice Defever, Christian Fischer and Jens Suedekum

CEP Discussion Papers from Centre for Economic Performance, LSE

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: Firm organization; input sourcing; relational contracts; supplier search; processing trade; China (search for similar items in EconPapers)
JEL-codes: D23 F23 L23 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-com and nep-cta
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Relational contracts and supplier turnover in the global economy (2016) Downloads
Working Paper: Relational Contracts and Supplier Turnover in the Global Economy (2016) Downloads
Working Paper: Relational Contracts and Supplier Turnover in the Global Economy (2015) Downloads
Working Paper: Relational contracts and supplier turnover in the global economy (2015) Downloads
Working Paper: Relational contracts and supplier turnover in the global economy (2015) Downloads
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