Relationship-specific Investments Research Articles

Slavery Versus Labor

Under what conditions would a principal choose to buy a slave rather than to hire a free worker? First, slaves cannot leave at will, which reduces turnover costs; second, slaves can be subjected to physical punishments, which reduces enforcement costs. In complex tasks, relation-specific investments are responsible for high turnover costs, which makes principals prefer slaves over workers. At the other end of the spectrum, in simple tasks, the threat of physical punishment is a relatively cheap way to produce incentives as compared to rewards, because effort is easy to monitor, which again makes slaves the better alternative. The resulting equilibrium price in the market for slaves affects demand in the labor market and induces principals to hire workers for those intermediate tasks. A thorough analysis of the historical evidence confirms this pattern. The relative prevalence of slaves over workers further depends on the slave supply, the turnover costs and the cost of applying sticks. These comparative statics are used to shed light on cross-society differences in the use of slaves and on diachronic trends. Finally, the analysis sheds light on current policies to fight slavery and warns that some of them might have negative effects on the welfare of remaining slaves.

Relation-specific investment of the group of companies

Despite the deep scientific study of the theory of resource management, there is a lack of terminology consistency in terms of the choice of the most significant resources for the effective operation of companies that make up integration formation. There is a problem of identifying and applying specific assets in the practice of cooperative interaction between companies.The subject of the research is the development of a typology of companies’ group resources. The methodological basis of the study was the new institutional economic theory. According to this theory, the main criterion in making decisions about resources is the specificity. It has been proven that when implementing a cooperative strategy, a group of companies should invest in resources that have specific and idiosyncratic characteristics. Owning and disposing of such assets raises a number of problems, including hold-up problem, significant switching costs of alternative transaction, and reserve utility that causes underinvestment in assets. The study of reserve utility led to the development of an additional classification of specific assets: “selfish” and “cooperative”. A three-dimensional classification of company resources based on transaction frequency, level of specificity, and investment focus is proposed. The paper concludes that in the presence of a large volume of idiosyncratic resources of the cooperative type, the incentives for a rigid form of integration increase sharply. The converse is also true: in a vertical form of integration, it is important to separate the management of specific assets from non-specific ones.

Modulating the activity of right temporo-parietal junction by anodal tDCS enhances the agent’s repayment in hold-up game

Hold-up problem is very common in non-contractible relation-specific investment transactions. And this problem can affect by trust, cooperation and altruism behavior of human beings. Recent neuroscience researches had explored a network of right temporo-parietal junction (rTPJ) involved in human cooperation and altruism behavior. The purpose of this study is to modulate the activation of rTPJ through transcranial direct current stimulation (tDCS), and to study the influence of rTPJ on investment and offer behavior in hold-up game. The results of our study showed that the anodal stimulation significantly increased participants' offer compared with the cathodal and sham stimulation. A possible explanation is that changes in rTPJ activity induced by anodal stimulation improve the accuracy of agents' mental reasoning and promote cooperation by influencing agents' offer behavior.

Working Hard for Long-Distance Relationships: Geographic Proximity and Relationship-Specific Investments

Suppliers that are farther away from their customers make more relationship-specific investments (RSI). This association is more pronounced when it is less costly for the customer to switch to alternative suppliers and when the supplier operates in relatively opaque information environments. Using the introduction of new airline routes as an exogenous shock to the distance between supply chain partners, we show that the relation between supplier RSI and distance may be causal. We also provide evidence that suppliers with larger RSI are better able to maintain long-distance business relationships and are associated with higher firm value. These findings suggest an important dimension of supplier commitment: Suppliers use RSI as a signal of their willingness to fulfill on-going implicit claims.

원청-하청 간 거래관행이 혁신에 미치는 영향: 독일ㆍ미국의 자동차산업을 중심으로 (On the Impact of the Supplier-Buyer Relation on Innovation: Lessons from the German and the U.S. Automobile Industry)

원청-하청 간 거래관행이 혁신에 미치는 영향: 독일ㆍ미국의 자동차산업을 중심으로 (On the Impact of the Supplier-Buyer Relation on Innovation: Lessons from the German and the U.S. Automobile Industry)

Is protecting sunk investments an economic rationale for antitrust law?

Abstract In recent years, the economic foundation of antitrust law is increasingly being called into question. The hypothesis that antitrust law seeks to promote consumer welfare has historically been extremely popular but in recent years has come under attack. In part, this is due to the fact that neither the law, nor the decisions of competition law enforcers, can be fully explained as consistent with a strict consumer welfare standard. Neither do competition laws promote a textbook concept of total economic welfare, neither in their wording, nor in the way they are enforced. Some commentators argue that competition law should protect the competitive process, but this approach lacks a foundation in welfare economics and therefore lacks the ability to make basic trade-offs between desirable goals. This article puts forward an alternative hypothesis, which focuses on the sunk, relationship-specific investments made by market participants. We propose that an important, and overlooked, role of competition law is to protect trading partners from the threat of hold-up, where it is unreasonable for the parties to use conventional mechanisms to protect those sunk investments themselves. This approach can help to explain features of competition law and law enforcement that cannot be explained by the traditional consumer welfare or total welfare frameworks. We suggest that this approach offers promise as providing a consistent, comprehensive, economic foundation for competition law.

The varying impact of buyer and supplier expected relationship-specific investments on relationship governance

PurposeThe purpose of this paper is to investigate the differential influence of buyer and supplier relationship-specific investments (RSI) on a buyer’s relationship governance decisions.Design/methodology/approachBased on transaction economics and social exchange theories (SET), the authors develop a framework to understand how and when buyer and supplier RSI influence governance decisions. This model was tested using a survey of 301 Information Technology (IT) procurement professionals across a multitude of industries.FindingsThis research shows that buyer and supplier RSI impact governance decisions differently. Supplier investments are positively associated with relationship formalization when goals between both parties are shared. Buyer investments are more strongly related to formalization in technologically uncertain environments.Originality/valueThis research adds to the literature by integrating arguments from both transaction cost and SET to hypothesize why buyer and supplier investments have a differential impact on relationship governance decisions. In line with these arguments, it ultimately demonstrates conditions that render such investments more/less influential.

Customer concentration and corporate innovation: Evidence from China

This paper investigates the impact of customer concentration on corporate innovation in China. We hypothesize that a more concentrated customer base increases a supplier’s operational risk and causes firms to become more cautious with regard to investment in innovation. Moreover, a more concentrated customer base gives such customers stronger bargaining powers and makes suppliers less willing to make relationship-specific investments. Hence, the hold-up costs of customer concentration in China exceed the benefits that accrue from the economies of scale associated with such concentrations, which impede a supplier’s corporate innovation. Our results reveal that suppliers with higher customer concentrations produce fewer patents and invention patents. Moreover, our results are robust after adopting an instrumental variables approach. We further show that the effect is more pronounced in firms with lower business diversification and in firms that have lower stability in their major customers. Our paper sheds lights on the hitherto underexplored unfavorable impact of customer concentration on innovation.

Do Social Connections Mitigate Hold-up and Facilitate Cooperation? Evidence from Supply Chain Relationships

AbstractWe show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape firm boundaries.

Do Relation-Specific Investments Pay Off? Comparing NetValue of Cross- & Within-Sector Partnerships

Interorganizational partnerships are of high strategic importance and consequentially, social enterprises are increasingly engaging in partnerships either within or across societal sectors to address complex social issues and maximize the joint value created. We challenge the dominant, albeit untested, assumption in the literature that cross-sector partnerships are more effective in creating joint value than within-sector partnerships. Based on the relational view and an analysis of data from 186 SEs and 137 partners who participate in such collaborations, our results demonstrate that cross-sector partnerships do not perform more effectively than within-sector partnerships because of the additional costs in cross-sector settings. We thus enhance the literature on cross-sector partnerships through a close examination of the actual outcome in terms of the newly established construct of net value

Corporate customer concentration and stock price crash risk

Abstract Using a large sample of U.S. firms, we find that major corporate customer concentration is positively associated with a firm's future stock price crash risk. This positive relation is more pronounced when the supplier firms have made a higher level of relationship-specific investments, have a poorer information environment, and/or face lower customer switching costs. Our evidence suggests that exposure to an undiversified corporate customer base can have a negative bearing on a firm's crash risk.

Economic policy uncertainty and short-term financing: The case of trade credit

We examine the impact of economic policy uncertainty on trade credit. We document a decline (increase) in accounts payable, receivable, and net credit during periods of high (low) policy uncertainty and that firms react quickly to changes in uncertainty. The relation is long-term and holds after controlling for endogeneity, non-policy economic and political uncertainties, and the Great Recession. Industry competitiveness, proxied by firm market power, moderates the impact of economic policy uncertainty on trade credit. Uncertainty about monetary and fiscal policies, taxes, and regulations are the major drivers of trade credit changes. The reduction in trade credit during periods of increasing uncertainty can be explained by financial distress, constraints, and relation-specific investment channels.

On efficient firm formation

We study the self-organization of a population into productive partnerships (or “firms”) when agents are confronted with a hold-up problem upon making relation-specific investments in those firms. The problem may be mitigated if agents can leave a partnership in which they have invested, bearing the costs yet foregoing the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.

Guanxi orientation, value creation and value capture in buyer-supplier relationships: a dyadic perspective

PurposeThis paper aims to investigate the importance and prevalence of Guanxi in business interactions in network-based societies such as China, few studies have the phenomenon from a dyadic view. In a business dyad, one partner may not value Guanxi and take it as a template for actions as the other does.Design/methodology/approachThe authors propose that such collective and asymmetric Guanxi orientation influence both the creation and distribution of relational rent in a Guanxi dyad. Furthermore, relationship-specific investments (RSIs) moderate the relationship between dyadic Guanxi orientation and relational rent creation and distribution.FindingsBased on a matched sample of supplier-buyer dyads in China, the authors find that joint Guanxi orientation is positively related to joint pie creation, whereas Guanxi orientation imbalance has a positive effect on the pie distribution imbalance.Originality/valueThese results contribute to the literature by revealing how dyadic Guanxi dynamics and practices affect dyadic performance and providing managers with meaningful implications for dyadic Guanxi management.

Policy Uncertainty, Trade and Global Value Chains: Some Facts, Many Questions

This paper attempts to quantify the impact of economic policy uncertainty on overall trade and trade linked to global value chains. Using new data on policy uncertainty for 18 countries and 24 years, it finds a statistically significant negative impact of policy uncertainty on overall trade growth. A 1 percent increase in uncertainty is associated with a 0.02 percentage point reduction in the growth of goods and services trade, implying that the increase in policy uncertainty since mid-2018 may have caused a 1 percentage point decline in world trade growth. The paper also finds that the impact of policy uncertainty on trade linked to global value chains is similar to overall trade. This is likely to be the result of two opposing forces: global value chains are more dependent on relation-specific investments that are sensitive to policy uncertainty, but these investments also make trade patterns sticky. More research and better data are needed to disentangle these different effects empirically.

Customer Concentration and M&A Performance

This paper examines how the target’s customer concentration affects merger performance. We find that the acquirer purchasing a customer-concentrated firm experiences significantly lower stock market returns and worse long-run operating performance. The effect is more pronounced when customers face lower switching costs or the target undertakes a higher level of relationship-specific investments, exhibits higher cash volatility, or is acquired by a less well-known company. Further analysis shows that the negative association is mainly driven by corporate customers, while relatively safe government customers moderate the effect. We also find that shared major customers, overconfident CEOs, and poor corporate governance are more likely to increase the likelihood of customer-concentrated acquisitions. Overall, our findings suggest that higher customer concentration leads to lower value creation in mergers.

The Economic Basis of the Independent Contractor / Employee Distinction

In recent years, a controversy has erupted over the distinction between employees and independent contractors. Commentators have argued that in the modern “gig economy,” many people traditionally classified as independent contractors are as vulnerable as employees and should be granted the legal protections that employees alone normally enjoy. However, the distinction between the two categories remains inescapable, and the theoretical basis for it has not been identified. I argue that the distinction is derived from market structure. Employees are workers who, because they must make relationship-specific investments in a single firm, are subject to labor monopsony. Independent contractors do not make such relationship-specific investments, and hence normally operate in a competitive labor market. Employment and labor law may be explained as a method for protecting workers from labor monopsony; because independent contracts are not subject to labor monopsony, they do not require such protection.

Reciprocity and Veto Power in Relation-Specific Investments: An Experimental Study

Relation-specific investments are usually associated with great risk. Investors, afraid of being held up, are likely to invest too little, endangering both financial and organizational sustainability. Theory suggests that relation-specific investment decisions are mainly affected by potential ex-post bargaining, while experimental evidence shows social-preference-driven thinking affects both investors’ and investees’ behavior. We decompose an experimental hold-up game to identify the effect of reciprocity and the effect of veto power on investees’ transfers. In addition, we investigate the effects of corresponding information disclosures on investors’ performance as possible behavioral remedies to the hold-up problem. We find strong evidence of the effect of reciprocity and reciprocity-related information significantly lower investors’ suboptimal investment. Investors underestimate the effect of reciprocity without related information disclosure. In contrast, we find little evidence of the effect of ex-post veto power on investment decisions. Our results imply that reciprocity-related information disclosure is helpful in promoting both financial and organizational sustainability.

Partner opportunism and willingness to engage in project relationships

PurposeThe paper seeks to understand the implications of partner opportunism for project relationships.Design/methodology/approachBased on the theoretical literature, the paper presents a conceptual model considering the perspective of the organization impacted by partner opportunism.FindingsThe model proposes that partner opportunism lowers willingness to engage by creating perception of loss. The undesirable impact of opportunism on perceived loss is less if the partner has made high relation-specific investments. Also, the negative impact of perceived loss on willingness to engage is less if the partner is difficult to substitute.Research limitations/implicationsThe model can be tested in the context of information technology (IT) relationships because of scope for opportunism in IT project relationships. Data can be collected through experimental vignettes.Originality/valueThe model contributes by investigating novel aspects of governance, behavioral consequences of opportunism and relation-specific investments in project relationships. The paper suggests that organizations can protect themselves against the ill effects of partner opportunism by enabling their stakeholders to invest substantial time and effort in the relationship and fortify relational quality and bonding.

The moderating effect of Guanxi on supply chain competencies of logistics firms in China

ABSTRACT This paper aims to explore the causal linkages between information sharing, trust & commitment and relationship-specific investment, and logistics and supply chain (LSC) competencies of logistics service providers (LSPs). The moderating effect of Guanxi on the relationships between the three dimensions and LSC competencies of LSPs was also explored. A conceptual model of LSC competencies was developed based on Social Capital Theory. The hierarchical multiple regression analysis results based on a survey conducted in China reveal that relationship management factors (i.e. information sharing and trust & commitment) are significantly related to LSC competencies while relationship-specific investment has no significant relationship with LSC competencies. The results also reveal that significant negative moderation effects of Guanxi on the relationships between information sharing and positioning competency, between information sharing and distribution support competency. In addition, it was found that significant negative moderation effects of Guanxi exist on the relationships between relationship-specific investment and positioning competency.