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Do we need handshakes to cooperate in buyer-supplier relationships?

Author

Listed:
  • José De Sousa

    () (CES, University of Paris 1 and University of Rennes 2, Maison des Sciences Économiques)

  • Xavier Fairise

    () (Centre d’Études des politiques Économiques de l’Université d’Evry (EPEE et TEPP - FR CNRS no 3126))

Abstract

Based on differences in production costs, McLaren (1999) [“Supplier relations and the market context: a theory of handshakes”, Journal of International Economics 48, 121-138] demonstrates that informal ‘handshake’ arrangements foster cooperation in buyer-supplier relationships, compared to formal contractual arrangements. This may explain international differences in procurement practices, such as American vs. Japanese. However, McLaren’s result holds under particular assumptions about production costs. Allowing for more traditional assumptions in procurement practices, such as relationship-specific investment costs and renegotiable contracts, we find in contrast that formal contractual arrangements may induce more cooperation than handshakes.

Suggested Citation

  • José De Sousa & Xavier Fairise, 2009. "Do we need handshakes to cooperate in buyer-supplier relationships?," Documents de recherche 09-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  • Handle: RePEc:eve:wpaper:09-15
    as

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    File URL: http://epee.univ-evry.fr/RePEc/2009/09-15.pdf
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    References listed on IDEAS

    as
    1. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, pages 121-138.
    2. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, pages 125-147.
    3. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    4. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
    5. Alan Schwartz & Robert Scott, "undated". "Contract Theory and the Limits of Contract Law," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1011, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    6. Qiu, Larry D. & Spencer, Barbara J., 2002. "Keiretsu and relationship-specific investment: implications for market-opening trade policy," Journal of International Economics, Elsevier, pages 49-79.
    7. Spencer, Barbara J & Qiu, Larry D, 2001. "Keiretsu and Relationship-Specific Investment: A Barrier to Trade?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 871-901, November.
    8. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, pages 125-147.
    9. Banri Asanuma, 1985. "The Organization of Parts Purchases in the Japanese Automotive Industry," Japanese Economy, Taylor & Francis Journals, pages 32-53.
    10. Banri Asanuma, 1985. "The Contractual Framework for Parts Supply in the Japanese Automotive Industry," Japanese Economy, Taylor & Francis Journals, pages 54-78.
    11. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, pages 478-501.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Incomplete contracts; relationship-specific investments; cooperation;

    JEL classification:

    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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