Relational Contracts and Supplier Turnover in the Global Economy

48 Pages Posted: 27 Aug 2015

See all articles by Fabrice Defever

Fabrice Defever

City University London

Christian Fischer

Heinrich Heine University Dusseldorf; University of Bayreuth - Department of Economics

Jens Suedekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Date Written: August 2015

Abstract

Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency-enhancing cooperations 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 offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects 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 collaboration with their supplier. From our model, we develop an instrumental 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 effect of match durations on relational contracting.

Keywords: China, Firm organization, Input sourcing, Processing trade, Relational contracts, Supplier search

JEL Classification: D23, F23, L23

Suggested Citation

Defever, Fabrice and Fischer, Christian and Südekum, Jens, Relational Contracts and Supplier Turnover in the Global Economy (August 2015). CEPR Discussion Paper No. DP10784, Available at SSRN: https://ssrn.com/abstract=2652154

Fabrice Defever (Contact Author)

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Christian Fischer

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

University of Bayreuth - Department of Economics ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Jens Südekum

Heinrich-Heine-University Duesseldorf, Duesseldorf Institute for Competition Economics (DICE) ( email )

Universitaetsstr. 1
Duesseldorf, NRW 40225
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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