In this paper, we study supplier–firm interactions to explain firms' outsourcing relationships. We show that in an imperfect information setup a firm learns about the quality of its suppliers through repeated interaction. As the firm determines the suppliers' quality with greater precision, it gives a greater proportion of its contracts to these “better” suppliers. We report evidence from African manufacturing firms that is consistent with our hypothesis: both frequency and volume of transactions increase with the length of a firm's relationship with its supplier. These effects are stronger in poor contracting environments.
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Publisher Info
Paper provided by Department of Economics, College of Business, Florida Atlantic University in its series Working Papers with number
04024.
Length: 11 pages Date of creation: Feb 2004 Date of revision:
Apr 2005 Publication status: Published in Southern Economic Journal, Vol. 72, No. 2 Handle: RePEc:fal:wpaper:04024