Relational Contracts and Trust in a High-Tech Industry

JIWP Number: 2101

Calzolari, G., Felli, L., Koenen, J., Spagnolo, G. and Stahl, K. O.

Abstract

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.

Classification JEL
D86
L14
L62
O34
JIWP