Contracting and Efficiency in the Surgical Goods Cluster of Sialkot, Pakistan

Abstract

This paper provides empirical evidence of the inefficiency of contracting institutions (measured by high switching costs) among surgical instrument producers in Sialkot, Pakistan, even though it is an industrial cluster where manufacturers have access to a multiplicity of suppliers. Following the methodology of Johnson, McMillan, and Woodruff (2002), we found that nearly 50% of firms in the sample would reject an untried supplier offering a lower price. The decision to reject a prospective new supplier offering a 10% discount was positively related to the complexity of the input and measures of relational contracting, and negatively related to a belief in informal contract enforcement mechanisms. Firms were more likely to switch to the prospective discount supplier when they were introduced through a business network. Belief in formal contract enforcement was not significant in any of the regressions.

Keywords: relational contracting, switching costs, law and economics, agglomeration, Pakistan

JEL Classification: K0, L14, O13, O17