DP12267 Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers
|Author(s):||Giacomo Calzolari, Leonardo Felli, Johannes Koenen, Giancarlo Spagnolo, Konrad O Stahl|
|Publication Date:||September 2017|
|Keyword(s):||Competition, Hold-up Problem, Innovation, Management Practices, Procurement, Relational Contracts, Specific Investment, Supply Chains, Trust|
|JEL(s):||D22, D86, L22, L62|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12267|
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.