Relational contracts and supplier turnover in the global economy

Abstract

Headquarters and their specialized component suppliers have a vital interest in establishing long-term collaborations. When formal contracts are not enforceable, such efficiency enhancing cooperation's can be established via informal agreements, but relational contracts have been largely ignored in the literature on the international organization of value chains. In this paper, we develop a dynamic property rights model of global sourcing. A domestic headquarter collaborates with a foreign input supplier and makes two decisions in every period: i) whether to engage in a costly search for a better partner, and ii) whether to make a non-binding offer to overcome hold-up problems. Our key result is that the possibility to switch partners crucially affects the contractual nature of buyer-supplier relationships. In particular, some patient firms do not immediately establish a relational contract, but only when they decide to stop searching and thus launch a long-term collaboration with their supplier. From our model, we develop an instrumental variable estimation strategy that we apply using transaction-level data of fresh Chinese exporters to the US. We obtain empirical evidence in line with the theoretical prediction of a positive causal effect of match durations on relational contracting.

Economic preferences and trade outcomes

“…Given these risks and uncertainties, it is unsurprising that complex, but (still) incomplete contracts govern the actual trade interactions. In addressing these complex contracts and their dynamic nature, Defever et al (2016) and Kukharskyy (2016) have shown that only sufficiently patient firms may establish efficient long-term supplier collaborations. Findings by Araujo et al (2016); Aeberhardt et al (2014) and Rauch and Watson (2003) point to relationships being developed slowly, starting with small test orders until a relationship is established, reflecting reciprocity considerations.…”

The DNA of the domestic value added (DVA) in exports: Firm‐level analysis of DVA in exports

“…In part VII, I use the duration of trade relationships (Defever, Fischer, & Suedekum, ) instead of correlation of trade flows over time. Long trade duration ( h ) is defined as trade spells at HS6 product ( p ) and country of destination ( c )/dispatch ( d ) that are active for more than 3 years.…”

“…Long trade duration (h) is defined as trade spells at HS6 product (p) and country of destination (c)/dispatch (d) that are active for more than 3 years. 12 Further the weighted average of specific product in total value of firm export/import is used to define the variable of contractual exporter/importer: 11 Defever, Fischer, and Suedekum (2016) T A B L E 9 (Continued) | 2593…”

Global Factors Driving Inflation and Monetary Policy: A Global VAR Assessment

“…Bernanke et al (2005), pointing to the Mundell Fleming trilemma, recall that the independence of EMEs monetary policy is limited if they wish to maintain a stable exchange rate. Furthermore, Defever et al (2016), stressing the important interconnectedness of global economies through trade and financial markets, advocates that monetary policy has to consider the interest setting abroad because of exchange rate and export effects. They claim that moderate foreign growth and low foreign interest rates had prevented from early return to monetary normalization.…”