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A theory of trust failure and vertical integration in industrial districts

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  • Guido Merzoni

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Abstract

We model the interaction of independent firms within an industrial district as a repeated game of trust, where cooperative outcomes are not due to the cultural attitudes of the players, but the result of non-cooperative behaviour taking place in a stable organizational setting. When the outside option of changing partners is not too attractive, cooperation may arise also without ties between firms; when such attractiveness increases, cooperation may only be guaranteed by making the relationship more stable through a formal commitment, which may lead to a fullyfledged vertical integration. As the efficiency gains of changing partners becomes even larger, stable relationships are no longer optimal and the traditional model of industrial districts breaks down.

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Paper provided by Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS) in its series DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo with number dis1001.

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Date of creation: 2010
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Handle: RePEc:dis:wpaper:dis1001

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Keywords: trust relationships; industrial districts; vertical integration;

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  1. Parikshit Ghosh & Debraj Ray, 1995. "Cooperation in Community Interaction Without Information Flows," Boston University - Institute for Economic Development 64, Boston University, Institute for Economic Development.
  2. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
  3. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  4. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  5. Samuel Bowles & Herbert Gintis, 2002. "Social Capital and Community Governance," Economic Journal, Royal Economic Society, vol. 112(483), pages 419-436, November.
  6. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  7. Colombo Ferdinando & Merzoni Guido, 2004. "Reputazione, flessibilità e durata ottima dei contratti," Economia politica, Società editrice il Mulino, issue 2, pages 233-268.
  8. Colombo, Ferdinando & Merzoni, Guido, 2006. "In praise of rigidity: The bright side of long-term contracts in repeated trust games," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 349-373, March.
  9. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
  10. Annen, Kurt, 2003. "Social capital, inclusive networks, and economic performance," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 449-463, April.
  11. Ferdinando Colombo & Guido Merzoni, 2008. "For how long to tie your hands? Stable relationships in an unstable environment," Journal of Economics, Springer, vol. 95(2), pages 93-120, November.
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