Discussion paper

DP12267 Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers

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-specifi c
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.

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Citation

Spagnolo, G, G Calzolari, L Felli, J Koenen and K Stahl (eds) (2017), “DP12267 Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers”, CEPR Press Discussion Paper No. 12267. https://cepr.org/publications/dp12267