The Value of Relational Adaptation in Outsourcing: Evidence from the 2008 Shock to the Us Airline Industry

Ricard Gil (Johns Hopkins University)
Myongjin Kim (University of Oklahoma)
Giorgio Zanarone (CUNEF)

Abstract : In this paper, we theoretically analyze, and empirically test for, the importance of relational adaptation in outsourcing relationships using the airline industry as case study. In the airline industry, adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers outsource to independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the urgency of needed adjustments requires that adaptation be informal and hence enforced relationally. Our model shows that for relational adaptation to be self-enforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional airline’s cost of adapting flight schedules across joint routes. Thus, when facing a negative economic shock, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, and hence higher relationship value. We analyze the evolution of U.S. airline networks around the 2008 financial crisis, and we find that consistent with our predictions, routes outsourced to regional networks with worse average weather, and hence higher adaptation costs, were more likely to survive the shock.

Supply Side Effects of Pollution Tax Rate Asymmetries

Harald Hinterecker (Karl-Franzens-Universität Graz)
Michael Kopel (Karl-Franzens-Universität Graz)

Abstract : Emphasizing the strategic interaction between a multi-national manufacturer and its supplier, we investigate the effect of asymmetric per-unit pollution tax rates in two countries on a manufacturer's location decision. We find that an increase in the pollution tax in one country does not necessarily decrease the total profit of a multinational manufacturer. Accounting for supply side effects, we show that a commitment to co-locate in an environ- mentally stringent region might be optimal for the manufacturer. Additionally, we illustrate that neglecting supply side interactions when determining emission tax rates might result in unintended consequences on environmental damage and social welfare.

The Determinants of Firm R&d Investment: a Revisit to Tobin's Q Theory with Product-market Competition Assumption

Hoang M. Luong (The University of Greenwich)
Mehmet Ugur (The University of Greenwich)

Abstract : Recently, the link between the traditional Tobin’s Q theory and research and development (R&D) investment has been explored by several studies. In a way to contribute to this emerging literature, our paper focuses on two issues in applying Tobin’s Q theory: the assumption of perfect market competition and the measure of Tobin’s Q. We argue that the former might not be hold, as it overlooks the relationship between market power and innovation that dates back to Schumpeter (1942). With respect to the latter, we propose using the difference in the lagged value of Tobin’s Q, instead of its level in order to capture the expectations of the firm managers about future growth opportunities. Utilizing the generalized method of moments (GMM) estimation on a dataset of 3,985 manufacturing firms from 15 OECD countries over the 2005-2013 period, we report several findings. First, we show that the difference in lagged value of Tobin’s Q has significant and positive effect on firm R&D investment. Second, we report that the relationship between R&D investment and product-market competition is non-linear: R&D investment increases as competition increases from a low level and then decreases as competition exceeds a critical threshold. These findings suggest that Tobin’s Q is a significant predictor of R&D investment but does not reflect all information that the firm takes into account in its investment decisions. Therefore, we call for an augmented Tobin’s Q model, in which market power is considered as a source of rents not captured in the stock-market valuation of the firm.

Market Shares of Agricultural Cooperatives Across Sectors and Countries in the European Union

Anna Petruchenya (Rotterdam School of Management, Erasmus University)
George Hendrikse (Rotterdam School of Management, Erasmus University)

Abstract : Theoretical predictions regarding the market shares of cooperatives seem to be at odds with empirical evidence. It appears that cooperative market shares are higher in sectors where large value is added at the downstream level and in countries with strong contracting institutions. We test a number of theoretical predictions regarding the degree of forward vertical integration by using the data on agricultural sectors in the countries in the European Union. Conclusions from the empirical analysis are formulated in terms of cooperative market shares and variables measuring sector-level asset specificity, uncertainty, degree of product diversification, and country-level quality of contracting institutions.