DP16653 Relational Contracts and Trust in a High-Tech Industry
We study how informal buyer-supplier relationships in the German automotive industry aﬀect 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 eﬀects hold only for parts involving unsophisticated technology, not when technology is sophisticated. We rationalize these ﬁndings within a relational contracting model that critically focuses on changes in the bargaining power, due to diﬀerences in the costs of switching suppliers.