The Value of Relational Contracts in Outsourcing: Evidence from the 2008 shock to the US Airline Industry* Ricard Gil Myongjin Kim Giorgio Zanarone Queen’s University University of Oklahoma CUNEF
[email protected] [email protected] [email protected] December 2018 Abstract We study the importance of relationships, relative to formal contracts, as a tool to govern transactions across firm boundaries. Guided by a simple model, we show that the likelihood that a major airline continues to outsource a route to a regional partner after the 2008 crisis increases in the present discounted value of their relationship, and more so on routes characterized by strong contracting frictions. We also show that major and regional airlines involved in higher-value relationships are more likely to help each other under adverse weather by exchanging landing slots. Our evidence suggests that even in economies with strong institutions and in industries governed by sophisticated technology and standardized formal contracts, informal relationships play a central role in promoting cooperation and performance. Keywords: Relational contracting, adaptation, outsourcing, airlines JEL codes: L14, L22, L24, L93 * We thank Ricardo Alonso, Benito Arruñada, Dan Barron, Alessandro Bonatti, Giacomo Calzolari, Marco Casari, Decio Coviello, Matthias Dewatripont, Mikhail Drugov, John de Figueiredo, William Fuchs, Luis Garicano, Bob Gibbons, María Guadalupe, Hideshi Itoh, Mara Lederman, Alex Lin, Rocco Macchiavello, Bentley MacLeod, Mark Moran, Ameet Morjaria, Joanne Oxley,