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.
