DP16653 Relational Contracts and Trust in a High-Tech Industry

Author(s): Giacomo Calzolari, Leonardo Felli, Johannes Koenen, Giancarlo Spagnolo, Konrad O Stahl
Publication Date: October 2021
Keyword(s): bargaining power, Buyer-Supplier Contracts, hold-up, Relational Contracts
JEL(s): D86, L14, L62, O34
Programme Areas: Industrial Organization, Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16653

We study how informal buyer-supplier relationships in the German automotive industry a�ect procurement. Using unique data from a survey focusing on these, we show that more trust, the belief that the trading partner acts to maintain the mutual relationship, is associated with both higher quality of the automotive parts and more competition among suppliers. Yet both e�ects hold only for parts involving unsophisticated technology, not when technology is sophisticated. We rationalize these �ndings within a relational contracting model that critically focuses on changes in the bargaining power, due to di�erences in the costs of switching suppliers.