Relational Adaptation Within and Between Firms: Evidence from the Us Airline Industry

Abstract : We study how governance and firm boundaries affect an organization’s ability to adapt to unforeseen contingencies. To do so, we focus on the airline industry, where adaptation of flight schedules under bad weather is not formally contractible, and yet is essential for network performance. In our setting, major airlines may achieve adaptation through four different governance structures: (1) reshuffling flights operated through their own planes; (2) reshuffling flights operated by fully-owned regional partners; (3) reshuffling flights operated by independent regional partners; or (4) reshuffling flights operated by non-partners – competing domestic majors, international carriers, cargo aircrafts, or private planes. The major’s formal control over adaptation differs across governance structure, being maximum under (1), medium-high under (2), and low under (3) and (4). This creates a potential need for relational contracting to ensure timely adaptation both under integrated partnership (governance (2)) and under collaborative outsourcing (governance (3)), as argued by Baker, Gibbons and Murphy (2002). Using data from landing slot exchanges in the three airports of NYC during February 2016 under Ground Delay Programs called on by the Federal Aviation Administration, we examine differences in the nature, size and composition of slot exchanges across all four governance structures. Our results are consistent with a theoretical framework that compares vertical integration, relational contracting and arms’ length contracting as means of adaptation.

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Trust, Efficiency and Organizations: Evidence from Rwanda

Abstract : When contract enforcement is limited and markets are missing, trust becomes essential to economic exchange within large, complex, organizations. This paper explores the relationships between trust, organization and efficiency by focusing on coffee mills in Rwanda. We take advantage of three features of the context: [1] large number of large firms within an homogenous sector in a LDC; [2] simple technology allows for precise measurement of good management practices and unit costs differences and [3] a country in which, due to both long and recent history, significant variation in trust across narrowly defined communities is expected. We conduct a comprehensive firm survey of all mills, interviewing managers, owners, collectors, workers and farmers and match the data with a number of geo-spatial datasets. We obtain precise measures of trust by using canonical questions and play trust games among the respondents. We obtain information on specific managerial practices relevant to the industry and focus on the establishment of interlinked transactions between wet mills and farmers. Within narrowly defined locations we document significant dispersion in unit costs across mills. The dispersion is generated by variation in unit costs other than conversion ratios and coffee cherries input prices, i.e. from components of unit costs that are directly affected by management practices. We find that relationship-specific measures of trust positively correlate with both efficiency and managerial practices as predicted by theory. The importance of trust in an environment with missing markets overturns standard presumptions on the relationship between competition and efficiency. We show preliminary evidence that competition is associated with lower trust and higher unit costs. The evidence suggests that building trust is essential in successfully managing agricultural value chains and that the market is characterized by pecuniary externalities not mediated by prices.

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Learning and the Value of Trade Relationships

Abstract : This paper quantifies the value of importer-exporter relationships. We show that almost 80 percent of U.S. imports take place in pre-existing relationships, with sizable heterogeneity across countries, and show that traded quantities and survival increase as relationships age. We develop a two-country general equilibrium trade model with learning that is consistent with these facts. A model-based measure of relationship value explains survival during the 2008-09 crisis. Knowledge accumulated within long-term relationships is quantitatively important: wiping out all memory from previous interactions, on average, reduces consumption by 5 percent on impact and by 48 percent over the transition back to steady state.

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