Self-Enforcing Agreements and Relational Contracting: Evidence from California Highway Procurement

Abstract

We empirically examine the impact of relationships between contractors and subcontractors on firm pricing and entry decisions in the California highway procurement market using data from auctions conducted by the California Department of Transportation. Relationships in this market are valuable if they mitigate potential hold-up problems and incentives for ex post renegotiation arising from contractual incompleteness. An important characteristic of informal contracts is that they must be self-enforcing, so the value of relationships between firms and suppliers depend on the extent of possibilities for future interaction. We construct measures of the stock of contractors' prior interactions with relevant subcontractors and, most importantly, an exogenous instrument to measure the future value of ongoing relationships that is orthogonal to contractor-subcontractor match-specific productivity. We find that a larger stock of relationships leads to a greater likelihood of entry and to lower bids. Importantly, this relationship does not hold in periods of time and areas with little future contract volume, suggesting that the value of the future is crucial in providing value for informal contracts.

The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports

“…3 Alongside a larger literature that studies formal contracts between firms (see Lafontaine and Slade 2012 for a survey), some studies have focused on the relationship between informal enforcement mechanisms and formal contract choice (see, e.g., Corts and Singh 2004;Kalnins and Mayer 2004;Lyons 2002;Gil and Marion 2013). With the exception of Gil and Marion (2013), these papers also rely on cross-sectional data and proxy the rents available in the relationship with product, firm, or market characteristics that might affect contractual outcomes in other ways.…”

“…With the exception of Gil and Marion (2013), these papers also rely on cross-sectional data and proxy the rents available in the relationship with product, firm, or market characteristics that might affect contractual outcomes in other ways. the supply of high-quality roses to distant markets, coordination along the supply chain is crucial.…”

Competitive tendering versus performance-based negotiation in Swiss public transport

“…However, costs of retendering may increase due to unreasonable low initial tender prices and a decreasing number of competitors (Wallis et al, 2010;Hensher and Stanley, 2010). Also, competitive tendering may generate administrative costs to operators and regulators (Hensher, 1988;Saussier et al, 2009;Gil and Marion, 2012;Yescombe, 2007). Third, most of the studies focus primarily on cost savings rather than on value for money.…”

The Effect of Discretion on Procurement Performance

“…They also point out that in restricted auctions it is more likely that more reputable contractors are selected. Gil and Marion (2013) analyse the effect of repeated interaction in the subcontractors market for California's highways and find that past interaction has an effect on bidding behavior only if there is the expectation of future profits. Lalive and Schmutzler (2011) study the procurement of the railway service in Germany, comparing negotiations (with the incumbent) and open auctions.…”