Header

UZH-Logo

Maintenance Infos

Long-term relationships: static gains and dynamic inefficiencies


Hémous, David; Olsen, Morten (2018). Long-term relationships: static gains and dynamic inefficiencies. Journal of the European Economic Association, 16(2):383-435.

Abstract

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. (

Abstract

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. (

Statistics

Citations

Dimensions.ai Metrics

Altmetrics

Downloads

12 downloads since deposited on 18 Jan 2018
12 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2018
Deposited On:18 Jan 2018 08:37
Last Modified:20 Sep 2018 04:27
Publisher:Oxford University Press
ISSN:1542-4766
OA Status:Green
Publisher DOI:https://doi.org/10.1093/jeea/jvx019
Related URLs:https://academic.oup.com/jeea/advance-article/doi/10.1093/jeea/jvx019/4037432

Download

Download PDF  'Long-term relationships: static gains and dynamic inefficiencies'.
Preview
Filetype: PDF (Appendix)
Size: 705kB
Download PDF  'Long-term relationships: static gains and dynamic inefficiencies'.
Preview
Content: Accepted Version
Filetype: PDF
Size: 1MB