Economics at your fingertips  

A Comparison of Exit and Voice Relationships Under Common Uncertainty

Herbert Dawid and Michael Kopel ()

Journal of Economics & Management Strategy, 2003, vol. 12, issue 4, 531-555

Abstract: We consider a repeated interaction between a manufacturing firm and a subcontractor. The relationship between the two parties is characterized (1) by moral hazard, and (2) by the fact that they do not have perfect knowledge about the base cost level of the project, which is carried out by a subcontractor (the parties only have identical a priori beliefs). We consider a two‐period model where the players can update their estimate of the base cost level according to incoming information. Exit relationships, where the firm signs one‐period contracts with different subcontractors, are compared with voice relationships, where both partners commit to a two‐period interaction and (due to information sharing and face‐to‐face communication between the partners) additional information about the base cost level is generated. It is shown that in such a dynamic framework with common uncertainty the quality of the additional information plays a crucial role in determining the characteristics of the optimal relationship: voice‐based strategies governed by long‐term contracts are preferable if the precision of the additional information about the base cost level is high. If the precision of the additional signal is low, exit strategies with frequent changes of the subcontractors are optimal for the manufacturer.

Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
http://www.blackwell ... ref=1058-6407&site=1

Access Statistics for this article

More articles in Journal of Economics & Management Strategy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().

Page updated 2021-04-07
Handle: RePEc:bla:jemstr:v:12:y:2003:i:4:p:531-555