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Trust, Investment and Competition: Theory and Evidence From German Car Manufacturers

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Listed:
  • Giacomo Calzolari
  • Leonardo Felli
  • Johannes Koenen
  • Giancarlo Spagnolo
  • Konrad O. Stahl

Abstract

Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality|but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and evaporate for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers|but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).

Suggested Citation

  • Giacomo Calzolari & Leonardo Felli & Johannes Koenen & Giancarlo Spagnolo & Konrad O. Stahl, 2019. "Trust, Investment and Competition: Theory and Evidence From German Car Manufacturers," CRC TR 224 Discussion Paper Series crctr224_2019_081, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2019_081
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    Cited by:

    1. Akifumi Ishihara, 2020. "On Multitasking and Job Design in Relational Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 693-736, December.
    2. Hahn, Nadine, 2024. "Who is in the driver's seat? Markups, markdowns, and profit sharing in the car industry," ZEW Discussion Papers 24-047, ZEW - Leibniz Centre for European Economic Research.
    3. De Chiara, Alessandro, 2020. "Precontractual investment and modes of procurement," European Economic Review, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Relational Contracts; Hold-up; Buyer-Supplier Contracts;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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