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We study how informal buyer-supplier relationships in the German automotive industry affect procurement. Using unique data from a survey focusing on these, we show that more trust, the belief that the trading partner acts to maintain the mutual relationship, is associated with both higher quality of the automotive parts and more competition among suppliers. Yet both effects hold only for parts involving unsophisticated technology, not when technology is sophisticated. We rationalize these findings within a relational contracting model that critically focuses on changes in the bargaining power, due to differences in the costs of switching suppliers.

Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality - but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and disappear for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers - but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).

In an environment in which both workers and firms undertake match specific investments, the presence of market competition for matches may solve the hold-up problems generated by the absence of complete contingent contracts. In particular, this paper shows that in a world in which workers' and firms' investments are separeted by market competition and contracts specify a simple (non-contingent) wage payment, investments are constrained efficient. Indeed, workers and firms invest efficiently given the equilibrium matches in which they are involved.

We develop a simple theoretical model of a long term buyer-supplier relationship with non-contractible buyer specific R&D investment, and derive predictions on the effects of trust and competition on suppliers' investment and buyers' procurement strategies. We address these issues empirically using unique survey data on individual buyer-supplier relationships in the German automotive industry. Consistent with the model's predictions, higher levels of trust are associated with higher investment levels - but also with more competitive procurement: trust and rents from reduced supplier competition in the procurement process emerge as substitutes both in theory and in the data.

Large public bureaucracies are commonly regarded as less efficient than modern private corporations. This paper explores how the degree of discretionary power might account for this difference in efficiency. Indeed, increasing the discretionary power of the intermediate layers of an organization - delegating power to them - enhances productivity by preventing collusion and capture between middle managers and line workers; provided that this detrimental form of collusion takes place in conditions of asymmetric information. To understand how this mechanism works requires an explicit model of the penalty for breach of a collusive agreement a party has to incur to walk away from such a side deal. Delegation is then a simple way for the principal to compensate the uninformed colluding party for walking out of collusion and for using/reporting the information leaked in the collusive negotiation. This threat clearly reduces the informed party incentive to participate in side deals and prevents collusion at a reduced cost.

We explore the determinants and effects of trust relationships between upstream suppliers and downstream producers. Using unique survey data on individual supplier-buyer relationships in the German automotive industry, we show, by means of different measures of supplier-buyer trust, that higher levels of trust mitigate relationship-specific underinvestment in a classical hold-up situation. Moreover, contrary to the extant literature, we show that higher levels of supplier's trust are reflected in the buyer's choice of a more competitive procurement strategy among potential suppliers.

The restructuring of a bankrupt company often entails the sale of such company. This paper suggests a way to sell the company that maximizes the creditors’ proceeds. The key to this proposal is the option left to the creditors to retain a fraction of the shares of the company. Indeed, by retaining the minority stake, creditors can transfer the control of the company while reducing to a minimum the rents that the sale of the company leaves in the hands of the buyer.

This paper uses a new data set on domestic child adoption to document the preferences of potential adoptive parents over born and unborn babies relinquished for adoption by their birth mothers. We show that adoptive parents exhibit significant biases in favor of girls and against African-American babies. A non-African-American baby relinquished for adoption attracts the interest of potential adoptive parents with probability 11.5% if it is a girl and 7.9% if it is a boy. As for race, a non-African-American baby has a probability of attracting the interest of an adopting parent at least seven times as high as the corresponding probability for an African-American baby. In addition, we show that a child's desirability in the adoption process depends significantly on time to birth (increasing over the pregnancy, but decreasing after birth) and on adoption costs. We also document the attitudes toward babies' characteristics across different categories of adoptive parents - heterosexual and same-sex couples, as well as single women and foreign couples. Finally, we consider several recently discussed policies excluding same-sex and foreign couples from the adoption process. In our data, such policies would reduce the number of adopted babies by 6% and 33%, respectively.

In a Case Law regime Courts have more flexibility than in a Statute Law regime. Since Statutes are inevitably incomplete, this confers an advantage to the Statute Law regime over the Case Law one. However, all Courts rule ex-post, after most economic decisions are already taken. Therefore, the advantage of flexibility for Case Law is unavoidably paired with the potential for time-inconsistency. Under Case Law, Courts may be tempted to behave myopically and neglect ex-ante welfare because, ex-post, this may afford extra gains from trade for the parties currently in Court. The temptation to behave myopically is traded off against the effect of a Court's ruling, as a precedent, on the rulings of future Courts. When Case Law matures this temptation prevails and Case Law Courts succumb to the time-inconsistency problem. Statute Law, on the other hand pairs the lack of flexibility with the ability to commit in advance to a given (forward looking) rule. This solves the time-inconsistency problem afflicting the Case Law Courts. We conclude that when the nature of the legal environment is sufficiently heterogeneous and/or changes sufficiently often, the Case Law regime is superior: flexibility is the prevailing concern. By the same token, when the legal environment is sufficiently homogeneous and/or does not change very often, the Statute Law regime dominates: the ability to overcome the time-inconsistency problem is the dominant consideration.

We find an economic rationale for the common sense answer to the question in our title courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. We study a buyer-seller multiplewidget model with risk-neutral agents, asymmetric information and ex-ante investments. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. In some cases, an ambiguous court that voids and upholds both with positive probability may be able to increase welfare even further.

We describe and analyze a contractual environment that allows a role for an active court. The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties' welfare under a veil of ignorance. In Anderlini, Felli, and Postlewaite (2006) the possibility of menu contracts between the informed buyer and the uninformed seller is described but not analyzed. Here, we fully analyze this case. We find that if we maintain the assumption that one of the potential objects of trade is not contractible exante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact. If however we let all widgets be contractible ex-ante, then multiple equilibria obtain. In this case the role for an active court is to ensure the inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs.