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Contracting and Efficiency in the Surgical Goods Cluster of Sialkot, Pakistan

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  • Theresa Thompson Chaudhry

    (Theresa Thompson Chaudhry is Associate Professor of Economics, Lahore School of Economics, Intersection Main Blvd Phase VI DHA and Burki Road, Burki (Lahore) 53200, Pakistan. Email: theresa@lahoreschool.edu.pk)

Abstract

This article provides empirical evidence of the inefficiency of contracting institutions (measured by high switching costs) among surgical instrument producers in Sialkot, Pakistan, even though it is an industrial cluster where manufacturers have access to a multiplicity of suppliers. Following the methodology of Johnson, McMillan and Woodruff (2002), we found that nearly 50 per cent of firms in the sample would reject an untried supplier offering a lower price. The decision to reject a prospective new supplier offering a 10 per cent discount was positively related to the complexity of the input and measures of relational contracting, and negatively related to a belief in informal contract enforcement mechanisms. Firms were more likely to switch to the prospective discount supplier when they were introduced through a business network. Belief in formal contract enforcement was not significant in any of the regressions.

Suggested Citation

  • Theresa Thompson Chaudhry, 2011. "Contracting and Efficiency in the Surgical Goods Cluster of Sialkot, Pakistan," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 12(1), pages 91-115, March.
    • Handle: RePEc:sae:soueco:v:12:y:2011:i:1:p:91-115
    DOI: 10.1177/139156141001200105
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    References listed on IDEAS

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    1. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 31, pages 1967-2072, Elsevier.
    2. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
    3. Simon Johnson & John McMillan, 2002. "Courts and Relational Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(1), pages 221-277, April.
    4. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
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    6. Nadvi, Khalid, 1999. "Collective Efficiency and Collective Failure: The Response of the Sialkot Surgical Instrument Cluster to Global Quality Pressures," World Development, Elsevier, vol. 27(9), pages 1605-1626, September.
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    Cited by:

    1. Theresa Thompson Chaudhry, 2011. "Prospects for Cooperative Marketing among Surgical Instrument Producers in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(1), pages 1-22, Jan-Jun.
    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 Kiel).

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    More about this item

    Keywords

    JEL: K0; JEL: L14; JEL: O13; JEL: O17; Relational contracting; switching costs; law and economics; agglomeration; Pakistan;
    All these keywords.

    JEL classification:

    • K0 - Law and Economics - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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