Trust, Competition and Innovation: Theory and Evidence from German Car Manufacturers
52 Pages Posted: 12 Mar 2015
Date Written: February 28, 2015
We develop a simple theoretical model of a long term buyer-supplier relationship with non-contractible buyer specific R&D investment, and derive predictions on the effects of trust and competition on suppliers’ investment and buyers’ procurement strategies. We address these issues empirically using unique survey data on individual buyer-supplier relationships in the German automotive industry. Consistent with the model’s predictions, higher levels of trust are associated with higher investment levels - but also with more competitive procurement: trust and rents from reduced supplier competition in the procurement process emerge as substitutes both in theory and in the data.
Keywords: trust, hold-up problem, competition, innovation, specific investment, procurement, relational contracts, management practices, suppliers, car manufacturers, German automotive industry
JEL Classification: D860, D220, L220, L620
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