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Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers

Author

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  • Calzolari, Giacomo
  • Felli, Leonardo
  • Koenen, Johannes
  • Spagnolo, Giancarlo
  • Stahl, Konrad O

Abstract

Using unique data from buyer-supplier relationships in the German automotive industry, we unveil a puzzle by which more trust in a relationship is associated with higher idiosyncratic investment, but also more competition. We develop a theoretical model of repeated procurement with non-contractible, buyer-specifi c investments rationalizing both observations. Against the idea that competition erodes rents needed to build trust and sustain relationships, we infer that trust and competition tend to go hand in hand. In our setting trust and rents from reduced supplier competition behave like substitutes, rather than complements as typically understood.

Suggested Citation

  • Calzolari, Giacomo & Felli, Leonardo & Koenen, Johannes & Spagnolo, Giancarlo & Stahl, Konrad O, 2017. "Relational Contracts, Competition and Innovation: Theory and Evidence from German Car Manufacturers," CEPR Discussion Papers 12267, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12267
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    More about this item

    Keywords

    Competition; Hold-up Problem; Innovation; Management Practices; Procurement; Relational Contracts; Specific Investment; Supply Chains; Trust;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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