Outsourcing Scope and Cooperation: Evidence from Airlines

Abstract : This paper provides evidence that broad outsourcing scope, whereby a buyer assigns a large share of its outsourced activities to a single supplier, increases both parties’ willingness to cooperate with each other. We also provide evidence that the effect of such broad scope on mutual cooperation is greater when externalities between suppliers, which are internalized in broad scope relationships, are more important. We document these effects in the context of outsourcing agreements between major and regional airlines in the US, where we measure cooperation as landing time slot exchanges during inclement weather. Because outsourcing scope – the share of a major’s routes that are assigned to a regional – varies across airports within a given outsourcing relationship, we are able to include relationship fixed effects in our regressions. This rare feature of our data allows us to separate the externality internalization mechanism from alternative mechanisms that operate at the interorganizational relationship level, and hence do not vary within a relationship, including dependence balancing, self-enforcing agreements, and interorganizational trust. To the best of our knowledge, this is the first empirical study showing that broad outsourcing scope governs bilateral interfirm cooperation, and isolating a precise mechanism through which it does so.

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I'll Pay You Later: Relational Contracts in the Oil Industry

Abstract : International contracts are difficult to enforce, in particular in the presence of weak institutions. Resource rich economies can hold-up multinational oil companies by renegotiating tax payments after investments occurred. Anticipating such events, firms can avoid such hold-ups by devising self-enforcing agreements and relying on future gains from trade. Theoretically, this can be achieved by back-loading investments, production and tax flows. Using the universe of contracts between resource rich economies and the seven largest multinationals (Big Oil) since 1950, we show that contracts between the multinationals and resource rich economies with weak institutions are back-loaded relative to countries with strong institutions. This pattern is robust to a variety of definitions, choices of sub-samples and a large number of controls. By exploiting the timing of the first oil price shock, we show that the back-loading in countries with weak institutions only emerges in the data in early 1970s, while we do not find any evidence for back-loading between 1950 and 1970. We attribute this to binding political constraints which would not allow the US to use its military power to enforce contracts since the early 1970s and which became public knowledge during the events surrounding the Yom Kippur War in 1973.

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Diversified Firms: Existence, Behaviors, and Performance

Abstract : We propose a micro-founded theory of diversified firms and offer supporting evidence. The theory suggests that diversified firms exist because they allow better deployment of factors that, because of sub-additive contracting costs, are hard to trade in fractions. Firms diversify into industries in which these factors are more productive than any alternatives available in the factor market. The theory portrays diversified firms as mechanisms that, like markets, allow specialization by enabling factors to be used on a larger scale. It identifies specific similarities in the factor demands and behaviors of the individual businesses constituting these firms and predicts that the productivity of a merged entity is below that of the acquirer, even when the merger is optimal.

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