Do Social Connections Mitigate Hold-Up and Facilitate Cooperation? Evidence from Supply Chain Relationships
50 Pages Posted: 6 Jun 2015 Last revised: 23 Apr 2020
Date Written: November 17, 2019
We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape the boundary of the firm.
Keywords: Innovation, Relation-Specific Investment, Social Connections, the Boundary of the Firm
JEL Classification: O31, L14, L24
Suggested Citation: Suggested Citation