Do Social Connections Mitigate Hold-Up and Facilitate Cooperation? Evidence from Supply Chain Relationships

50 Pages Posted: 6 Jun 2015 Last revised: 23 Apr 2020

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business

Date Written: November 17, 2019

Abstract

We show that prior social connections can mitigate hold-up in bilateral relationships and encourage relation-specific investment and cooperation when contracts are incomplete. We examine vertical relationships and show that relation-specific innovative activities by suppliers increase with the existence and strength of prior social connections between the suppliers’ managers and board members and those of their customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths and find that innovation drops for affected suppliers after the departure of socially connected individuals relative to unaffected suppliers. Our work sheds light on how social connections can shape the boundary of the firm.

Keywords: Innovation, Relation-Specific Investment, Social Connections, the Boundary of the Firm

JEL Classification: O31, L14, L24

Suggested Citation

Dasgupta, Sudipto and Zhang, Kuo and Zhu, Chenqi, Do Social Connections Mitigate Hold-Up and Facilitate Cooperation? Evidence from Supply Chain Relationships (November 17, 2019). Available at SSRN: https://ssrn.com/abstract=2614706 or http://dx.doi.org/10.2139/ssrn.2614706

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Kuo Zhang

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

Chenqi Zhu

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

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