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The Role of Repeated Interactions, Self-Enforcing Agreements and Relational [Sub]Contracting: Evidence from California Highway Procurement Auctions

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  • Gil, Ricard
  • Marion, Justin

Abstract

We examine the impact of relationships between contractors and subcontractors on firm pricing and entry decisions in the California highway procurement market using data from auctions conducted by the California Department of Transportation. Relationships in this market are valuable if they mitigate potential hold-up problems and incentives for ex post renegotiation due to contractual incompleteness. An important characteristic of informal contracts are that they must be self-enforcing, so that the value of relationships between firms and suppliers depend on the extent of possibilities for future interaction. We construct measures of the stock of contractors’ prior interactions with relevant subcontractors and find that a larger stock of relationships leads to lower bids and a greater likelihood of entry. Importantly, this relationship does not hold in periods of time and areas with little future contract volume, suggesting that the self-enforcement mechanism is crucial in providing value for informal contracts.

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Bibliographic Info

Paper provided by University of California Transportation Center in its series University of California Transportation Center, Working Papers with number qt7r14d10x.

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Date of creation: 01 Jan 2009
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Handle: RePEc:cdl:uctcwp:qt7r14d10x

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Keywords: Social and Behavioral Sciences;

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References

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  1. Simon Board, 2011. "Relational Contracts and the Value of Loyalty," American Economic Review, American Economic Association, vol. 101(7), pages 3349-67, December.
  2. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  3. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stéphane, 2008. "Renegotiation of concession contracts in Latin America: Evidence from the water and transport sectors," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 421-442, March.
  4. Gonzalez, Manuel & Arrunada, Benito & Fernandez, Alberto, 1998. "Regulation as a cause of firm fragmentation:the case of the Spanish construction industry," International Review of Law and Economics, Elsevier, vol. 18(4), pages 433-450, December.
  5. Mireia Jofre-Bonet & Martin Pesendorfer, 2003. "Estimation of a Dynamic Auction Game," Econometrica, Econometric Society, vol. 71(5), pages 1443-1489, 09.
  6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  7. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
  8. Ryan Kellogg, 2009. "Learning by Drilling: Inter-Firm Learning and Relationship Persistence in the Texas Oilpatch," NBER Working Papers 15060, National Bureau of Economic Research, Inc.
  9. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-63, July.
  10. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2004. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers 103, Edinburgh School of Economics, University of Edinburgh.
  11. Gregory Lewis & Patrick Bajari, 2011. "Procurement Contracting With Time Incentives: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1173-1211.
  12. Bull, Clive, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 147-59, February.
  13. Eccles, Robert G., 1981. "The quasifirm in the construction industry," Journal of Economic Behavior & Organization, Elsevier, vol. 2(4), pages 335-357, December.
  14. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
  15. Marion, Justin, 2007. "Are bid preferences benign? The effect of small business subsidies in highway procurement auctions," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1591-1624, August.
  16. Justin Marion, 2009. "How Costly Is Affirmative Action? Government Contracting and California's Proposition 209," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 503-522, August.
  17. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
  18. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
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Citations

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Cited by:
  1. Luigi Moretti & Paola Valbonesi, 2012. "Subcontracting in Public Procurement: An Empirical Investigation," "Marco Fanno" Working Papers 0154, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Macchiavello, Rocco & Morjaria, Ameet, 2013. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," CEPR Discussion Papers 9531, C.E.P.R. Discussion Papers.
  3. Jean-Baptiste Traversac & Hervé Lanotte, 2011. "An economic history of the Champagne contracts, lessons for regional development," ERSA conference papers ersa11p1145, European Regional Science Association.
  4. Stéphane Saussier & Carine Staropoli & Anne Yvrande-Billon, 2009. "Public–Private Agreements, Institutions, and Competition: When Economic Theory Meets Facts," Review of Industrial Organization, Springer, vol. 35(1), pages 1-18, September.
  5. Gregory Lewis & Patrick Bajari, 2011. "Moral Hazard, Incentive Contracts and Risk: Evidence from Procurement," NBER Working Papers 17647, National Bureau of Economic Research, Inc.

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