Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers

62 Pages Posted: 11 Sep 2017

See all articles by Giacomo Calzolari

Giacomo Calzolari

European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR); University of Bologna

Leonardo Felli

University of Cambridge, Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Johannes Koenen

ARC Econ GmbH

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Konrad O. Stahl

University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 2017

Abstract

Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic investment, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specific investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. In our setting trust and rents from reduced supplier competition behave like substitutes, rather than complements as typically understood.

Keywords: Competition, Hold-up Problem, Innovation, Management Practices, Procurement, Relational Contracts, Specific Investment, Supply Chains, Trust

JEL Classification: D22, D86, L22, L62

Suggested Citation

Calzolari, Giacomo and Felli, Leonardo and Koenen, Johannes and Spagnolo, Giancarlo and Stahl, Konrad O., Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers (September 2017). CEPR Discussion Paper No. DP12267, Available at SSRN: https://ssrn.com/abstract=3035261

Giacomo Calzolari (Contact Author)

European University Institute - Economics Department (ECO) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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University of Bologna ( email )

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Leonardo Felli

University of Cambridge, Faculty of Economics ( email )

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HOME PAGE: http://www.felli.info

CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Johannes Koenen

ARC Econ GmbH ( email )

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Germany

HOME PAGE: http://arc-econ.de

Giancarlo Spagnolo

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
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Rome, RM 00133
Italy

EIEF ( email )

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Italy

HOME PAGE: http://WWW.EIEF.IT

Konrad O. Stahl

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181 1875 (Phone)
+49 621 181 1874 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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