Macro-JI Seminar - Ezra Oberfield (Princeton)

Title: Firm-to-Firm Trade and Growth with Long-Term Relationships

Abstract

When it is difficult to enforce contracts through formal means, firms may engage in long term relationships with trading partners as a substitute. To reward a supplier for good performance, a buyer may choose to forgo the opportunity to find new, perhaps more efficient alternative suppliers. We study the implications of long term relationships for firm dynamics and aggregate productivity. We build a quantiative model of firm-to-firm trade where firm dynamics are driven the arrival of new potential suppliers and customers. When firms engage in long term relationships, young productive firms do not grow as quickly because potential customers are more likely to stay with their existing suppliers. Firm dynamics become slower, in that the variance of firm growth rates shinks, there is less mean reversion in size, the exit rate shrinks, and there is a thinner tail of the firm size distribution. We test these predictions using microdata on Indian manufacturing plants, showing that for industries that produce relationship-specific goods, each of these patterns is more pronounced in states with more congested courts. Finally, we find that the impact on aggregate productivity is non-trivial.