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A Comparison of Exit and Voice Relationships Under Common Uncertainty

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  • Herbert Dawid
  • Michael Kopel

Abstract

We consider a repeated interaction between a manufacturing firm and a subcontractor. The relationship between the two parties is characterized (1) by moral hazard, and (2) by the fact that they do not have perfect knowledge about the base cost level of the project, which is carried out by a subcontractor (the parties only have identical a priori beliefs). We consider a two‐period model where the players can update their estimate of the base cost level according to incoming information. Exit relationships, where the firm signs one‐period contracts with different subcontractors, are compared with voice relationships, where both partners commit to a two‐period interaction and (due to information sharing and face‐to‐face communication between the partners) additional information about the base cost level is generated. It is shown that in such a dynamic framework with common uncertainty the quality of the additional information plays a crucial role in determining the characteristics of the optimal relationship: voice‐based strategies governed by long‐term contracts are preferable if the precision of the additional information about the base cost level is high. If the precision of the additional signal is low, exit strategies with frequent changes of the subcontractors are optimal for the manufacturer.

Suggested Citation

  • Herbert Dawid & Michael Kopel, 2003. "A Comparison of Exit and Voice Relationships Under Common Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(4), pages 531-555, December.
    • Handle: RePEc:bla:jemstr:v:12:y:2003:i:4:p:531-555
    DOI: 10.1111/j.1430-9134.2003.00531.x
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    References listed on IDEAS

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    Cited by:

    1. João Teixeira, 2014. "Outsourcing with long term contracts: capital structure and product market competition effects," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 327-356, February.

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