The Value of Relational Contracts in Outsourcing: Evidence from the 2008 Shock to the US Airline Industry

67 Pages Posted: 27 Feb 2018

See all articles by Ricard Gil

Ricard Gil

Queen's University (Canada) - Smith School of Business; Johns Hopkins University - Carey Business School

Myongjin Kim

University of Oklahoma

Giorgio Zanarone

CUNEF

Date Written: 2018

Abstract

We study relational contracts as a means to govern transactions across firm boundaries. We focus on the airline industry, where real-time adaptation of flight schedules under bad weather is not formally contractible, and yet is essential for performance and long-term profitability. While outsourcing reduces the operating costs of major airlines, it increases their risk of failed adaptation due to a loss of control in favor of the regional partners. We theoretically show that majors and regionals can implement efficient rescheduling through self-enforcing relational contracts if their partnership’s present discounted value (PDV) outweighs the total adaptation cost. Using the beginning of the 2008 crisis as an exogenous shock, we find that, consistent with the centrality of relational contracts in governing airline partnerships, outsourced routes in networks with higher total adaptation cost, and hence higher PDV, were more likely to remain outsourced to the same partner after the crisis.

Keywords: Relational Contracting, Adaptation, Outsourcing, Airlines

JEL Classification: L14, L22, L24, L93

Suggested Citation

Gil, Ricard and Kim, Myongjin and Zanarone, Giorgio, The Value of Relational Contracts in Outsourcing: Evidence from the 2008 Shock to the US Airline Industry (2018). Available at SSRN: https://ssrn.com/abstract=3130748 or http://dx.doi.org/10.2139/ssrn.3130748

Ricard Gil

Queen's University (Canada) - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu

Myongjin Kim

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

Giorgio Zanarone (Contact Author)

CUNEF ( email )

Leonardo Prieto Castro 2
Madrid, Madrid 28040
Spain

HOME PAGE: http://gzanarone.cunef.edu

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