Relational contracts and supplier turnover in the global economy
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.
8 October 2015 Paper Number CEPDP1375
This CEP discussion paper is published under the centre's Trade programme.