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

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Listed:
  • José De Sousa
  • Xavier Fairise

Abstract

Does formal contracting foster cooperation in a buyer-supplier relationship? In line with the literature, we find that a renegotiable contract with relationship-specific joint investments does not make it possible to reach the first-best. However, we show that a renegotiable contract may induce more cooperation than an informal arrangement. This result may help to understand how cooperation emerges in Japanese procurement practices, which typically involve relationship-specific joint investments and renegotiable contracts.

Suggested Citation

  • José De Sousa & Xavier Fairise, 2010. "Do we need handshakes to cooperate in buyer-supplier relationships?," Working Papers SMART - LERECO 10-13, INRA UMR SMART-LERECO.
  • Handle: RePEc:rae:wpaper:201013
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    References listed on IDEAS

    as
    1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    2. Tai-Yeong Chung, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1031-1042.
    3. 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.
    4. McLaren, John, 1999. "Supplier relations and the market context: A theory of handshakes," Journal of International Economics, Elsevier, vol. 48(1), pages 121-138, June.
    5. Qiu, Larry D. & Spencer, Barbara J., 2002. "Keiretsu and relationship-specific investment: implications for market-opening trade policy," Journal of International Economics, Elsevier, vol. 58(1), pages 49-79, October.
    6. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    7. 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.
    8. Banri Asanuma, 1985. "The Organization of Parts Purchases in the Japanese Automotive Industry," Japanese Economy, Taylor & Francis Journals, vol. 13(4), pages 32-53.
    9. Banri Asanuma, 1985. "The Contractual Framework for Parts Supply in the Japanese Automotive Industry," Japanese Economy, Taylor & Francis Journals, vol. 13(4), pages 54-78.
    10. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
    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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