Tied up and Shocked: How Relational Contracting with Suppliers Constrains Global Buyers during an Economic Crisis

This chapter is motivated by a surprising empirical finding: During the 2008 economic crisis, leading global buyers of labor-intensive manufacturing goods were more likely to terminate contracts with suppliers based in countries with strong formal contract enforcement institutions than with those in countries where such institutions were weak. We develop a formal model that explains this counterintuitive finding as the result of heightened reliance on informal contracting when the formal contracting system is unreliable. This explanation contrasts with recent characterizations of outsourcing as an exercise of real options and adds to understanding of the effect of using relational contracting across multiple borders.