Long-term Relationships: Static Gains and Dynamic Inefficiencies
Research output: Contribution to journal › Journal article › Research › peer-review
Standard
Long-term Relationships : Static Gains and Dynamic Inefficiencies. / Hémous, David; Olsen, Morten.
In: Journal of the European Economic Association, Vol. 16, No. 3, 27.07.2017, p. 383–435.Research output: Contribution to journal › Journal article › Research › peer-review
Harvard
APA
Vancouver
Author
Bibtex
}
RIS
TY - JOUR
T1 - Long-term Relationships
T2 - Static Gains and Dynamic Inefficiencies
AU - Hémous, David
AU - Olsen, Morten
PY - 2017/7/27
Y1 - 2017/7/27
N2 - In the 1980s the Japanese “keiretsu” system of interconnected business groups was praised as a model to emulate, but since then Japan has often been criticized for being less innovative than the United States. In this paper we connect the two views and argue that tight business relationships can create dynamic inefficiencies and reduce broad innovations. In particular, we consider the repeated interaction between final good producers and intermediate input suppliers, where the provision of the intermediate input is noncontractible. We build a cooperative equilibrium where producers can switch suppliers and start cooperation immediately with new suppliers. We first consider broad innovations: every period, one supplier has the opportunity to create a higher quality input that can be used by all producers. Since relationships are harder to break in the cooperative equilibrium the market size for potential innovators is smaller and the rate of innovation might be lower than in the noncooperative equilibrium. We contrast this with a setting with relationship-specific innovations that we show are encouraged by the establishment of relational contracts. We illustrate the predictions of the model using the recent business history of the United States and Japan and further use patent data to show that U.S. patents are more general than Japanese and even more so in sectors using more differentiated inputs.
AB - In the 1980s the Japanese “keiretsu” system of interconnected business groups was praised as a model to emulate, but since then Japan has often been criticized for being less innovative than the United States. In this paper we connect the two views and argue that tight business relationships can create dynamic inefficiencies and reduce broad innovations. In particular, we consider the repeated interaction between final good producers and intermediate input suppliers, where the provision of the intermediate input is noncontractible. We build a cooperative equilibrium where producers can switch suppliers and start cooperation immediately with new suppliers. We first consider broad innovations: every period, one supplier has the opportunity to create a higher quality input that can be used by all producers. Since relationships are harder to break in the cooperative equilibrium the market size for potential innovators is smaller and the rate of innovation might be lower than in the noncooperative equilibrium. We contrast this with a setting with relationship-specific innovations that we show are encouraged by the establishment of relational contracts. We illustrate the predictions of the model using the recent business history of the United States and Japan and further use patent data to show that U.S. patents are more general than Japanese and even more so in sectors using more differentiated inputs.
KW - Faculty of Social Sciences
KW - C73
KW - K12
KW - L14
KW - O31
KW - O43
U2 - 10.1093/jeea/jvx019
DO - 10.1093/jeea/jvx019
M3 - Journal article
VL - 16
SP - 383
EP - 435
JO - Journal of the European Economic Association
JF - Journal of the European Economic Association
SN - 1542-4774
IS - 3
ER -
ID: 190213445