Trust, Investment and Competition: Theory and Evidence from German Car Manufacturers

59 Pages Posted: 25 Jul 2019

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)

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality - but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and disappear for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers - but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).

Keywords: relational contracts, hold-up, buyer-supplier contracts, bargaining power

JEL Classification: D860, L140, L620, O340

Suggested Citation

Calzolari, Giacomo and Felli, Leonardo and Koenen, Johannes and Spagnolo, Giancarlo and Stahl, Konrad O., Trust, Investment and Competition: Theory and Evidence from German Car Manufacturers (2019). CESifo Working Paper No. 7680, Available at SSRN: https://ssrn.com/abstract=3422263

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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Limburgerhof, 67117
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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Rome, 00187
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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