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Relational Contracting in Pakistan’s Surgical Instrument Cluster: An Empirical Study

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  • Theresa Thompson Chaudhry

    (Department of Economics, Lahore School of Economics, Lahore)

Abstract

This paper tests an idea from relational contracting theory [Macauley (1963); North (1990); Greif (1994); Kranton (1996)] that informal relationships can substitute for formal contract enforcement through the judicial system, from the analysis of a new survey of the surgical instrument cluster in Sialkot, Pakistan. Inter-firm trust is thought to lead to reduced transaction costs (a passive benefit of a cluster). Considered here are exchanges of goods between clustered suppliers and their customers, who are either members of the cluster or firms that interact frequently with it. Inter-firm trust is measured as the amount of trade credit offered to customers. The results show that suppliers are more likely to offer trade credit when they believe in the effectiveness of formal contract enforcement and when they participate in business networks (proxied by inter-firm communication). There is also some evidence that customer lock-in helps to develop inter-firm trust since firms give more credit when relationships are of longer duration, and as locked-in customers are less able to find alternate suppliers.

Suggested Citation

  • Theresa Thompson Chaudhry, 2010. "Relational Contracting in Pakistan’s Surgical Instrument Cluster: An Empirical Study," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(3), pages 213-237.
  • Handle: RePEc:pid:journl:v:49:y:2010:i:3:p:213-237
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    Cited by:

    1. Theresa Thompson Chaudhry, 2005. "Industrial Clusters in Developing Countries: A Survey of the Literature," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(2), pages 15-34, Jul-Dec.
    2. Haroon, Maryiam & Chaudhry, Azam, 2014. "Where do new firms locate? The effects of agglomeration on the formation and scale of operations of new firms in Punjab," Economics Discussion Papers 2014-21, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    Microeconomic Analyses of Economic Development; Transactional Relationships; Contracts and Reputation; Networks;

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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