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