Learning by Drilling: Inter-Firm Learning and Relationship Persistence in the Texas Oilpatch

44 Pages Posted: 8 Jun 2009 Last revised: 27 Aug 2022

See all articles by Ryan Kellogg

Ryan Kellogg

University of California, Berkeley

Date Written: June 2009

Abstract

This paper examines the importance of learning-by-doing that is specific not just to individual firms, but to pairs of firms working together in a contracting relationship. Using new, detailed data from the oil and gas industry, I find that the joint productivity of an oil production company and its drilling contractor is enhanced significantly as they accumulate experience working together. This learning is relationship-specific: drilling rigs generally cannot fully appropriate the productivity gains acquired through experience with one production company to their work for another. This result is robust to other ex ante match specificities.Relationship-specific learning is consequential because it implies that relationship stability is important to productivity. When two firms accumulate experience working together, relationship-specific intellectual capital is created that cannot be appropriated to pairings with other firms. If the relationship is broken, this capital is destroyed and productivity decreases, thereby giving firms an incentive to maintain long-term relationships. Accordingly, the data indicate that production companies prefer to work with drilling rigs which they have accumulated considerable experience rather than those with which they have worked relatively little. I demonstrate that this contracting pattern is difficult to explain with switching costs or ex ante match specificities alone.

Suggested Citation

Kellogg, Ryan, Learning by Drilling: Inter-Firm Learning and Relationship Persistence in the Texas Oilpatch (June 2009). NBER Working Paper No. w15060, Available at SSRN: https://ssrn.com/abstract=1415222

Ryan Kellogg (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

HOME PAGE: http://are.berkeley.edu/~kellogg/index.html

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