Buying Products from Whom You Know: Personal Connections and Information Asymmetry in Supply Chain Relationships

Abstract

This study investigates the role pre-existing personal connections play in a crucial element of the supply chain – supplier selection. We find that the likelihood that a potential supplier (hereafter, a vendor) is selected to be an actual supplier (hereafter, supplier) increases when personal connections between executives of the vendor and the customer exist. The magnitude of the effect varies predictably across management ranks and positions and is stronger when information asymmetries between a vendor and a customer are high. Conditioning on the existence of a supply-chain partnership, a departure of a personally connected executive precipitates the termination of the supply-chain relationship more than a departure of an unconnected executive. Additional analyses show personal connections are associated with less restrictive procurement-contract terms and with improved customer performance after the formation of a supply-chain relationship. Overall, our study highlights the role of personal connections in reducing information asymmetry and improving operating efficiency in the supply chain.

Keywords: Personal connections, Supplier selection, Supply chain, Information asymmetry

JEL Classification: G32, G34, L1, M11