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

Giacomo Calzolari (EUI, U. Bologna)
Leonardo Felli (LSE, U. Edinburgh)
Johannes Koenen (ARC Econ)
Giancarlo Spagnolo (SITE, Tor Vergata, EIEF)
Konrad O. Stahl (U. Mannheim)

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).

Ownership Changes, Management and Efficiency in Rwanda’s Coffee Industry

Ameet Morjaria (Kellogg School of Management)
Rocco Macchiavello (LSE)

Abstract : Markets in developing countries are characterized by long tails of inefficient and poorly run firms and by significant misallocation of assets – two symptoms that the market process that normally reallocates poorly run assets to better managed firms does not function well. This paper provides a detailed study of the Rwanda coffee industry, a context characterized by widespread inefficiencies and that has seen in recent years a process through which large multi-national groups have been integrating backward and acquiring a significant number of mills. Preliminary difference-in-difference results suggest that, controlling for mill and year fixed effects, a mill acquired by a foreign group improves productivity and profitability. Using a uniquely detailed survey panel we document how foreign groups change mills performance. Foreign groups change managers upon acquisition, recruit younger, more educated and higher ability managers and pay these managers a significantly higher salary, even conditional on manager characteristics. These “better” managers explain about half of the better performance associated with foreign ownership. Relative to other managers changes, managers of foreign groups attempt to implement more changes after being in charge of the mill, enjoy more autonomy from owners, but face more resistance from mill’s other constituencies. Domestic-owned groups have also expanded but are, in general, not associated with improvements in performance. We discuss implications for organizational change and for fostering market development in emerging countries.

Investment Bank Governance and Client Relationships

William Wilhelm (University of Virginia)
Zhaohui Chen (University of Virginia)
Alan Morrison (University of Oxford)
Xin Xue (University of Virginia)

Abstract : The relational contract at the heart of an investment banking relationship is valuable because it engenders and requires mutual trust in a setting where conflicts of interest are significant and are not easily resolved through formal contract. But a bank’s ability to commit to a relational contract depends on internal governance mechanisms that align the interests of individual bankers with those of the bank. We argue that increasing complexity in investment banks weakens internal governance and estimate a causal model that indicates that the likelihood of a relationship being broken is increasing in bank complexity.