Relational contracts and supplier turnover in the global economy

Defever, F., Fischer, C. & Suedekum, J. (2016). Relational contracts and supplier turnover in the global economy. Journal of International Economics, 103, pp. 147-165. doi: 10.1016/j.jinteco.2016.09.002

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Headquarters and their specialized component suppliers have a vital interest in establishing long - term collaborations. When formal contracts are not enforceable, such e ffi ciency enhancing cooperation’s 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 o ff er to overcome hold - up problems. Our key result is that the possibility to switch partners crucially a ff ects 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 collaborati on with their supplier. From our model, we develop an instrumen tal 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 e ff ect of match durations on relational contracting.

Item Type: Article
Uncontrolled Keywords: Firm organization; Input sourcing; Relational contracts; Supplier search; China
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics

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