Firm-to-Firm Relationships and the Pass-Through of Shocks: Theory and Evidence

Abstract

Economists have long suspected that firm-to-firm relationships might lower the responsiveness of prices to shocks due to the use of fixed-price contracts. Using transaction-level U.S. import data, I show that the pass-through of exchange rate shocks in fact rises as a relationship grows older. Based on novel stylized facts about a relationship's life cycle, I develop a model of relationship dynamics in which a buyer-seller pair accumulates relationship capital to lower production costs under limited commitment. The structurally estimated model generates countercyclical markups and countercyclical pass-through of shocks through variation in the economy's rate of relationship creation, which falls in recessions.

Networks and Trade

“…For example, Carvalho et al (2016) and Boehm et al (2016) use the Japanese Tohoku earthquake in 2011, while Barrot and Sauvagnat (2016) use U.S. natural disasters over a 30-year period, to identify idiosyncratic shocks to firms and their propagation through the supply chain. In related research, Heise (2016) examines propagation in old versus new relationships. He finds that, perhaps surprisingly, prices adjust more freely in old relationships compared to new ones.…”

On Price Dynamics With Search and Bargaining in the Product Market

“…We build upon the Diamond-Mortensen-Pissarides framework for the labor market and characterize the formation of B2B relationships in terms of search, matching and Nash bargaining. These relationships are long term in nature; in fact, although many partnerships between firms last less than 1 year, the most of the trade is accounted for by relationships that are longer than 1 year (e.g., Eslava et al (2015), Heise (2019)). Moreover, we make two specific assumptions.…”

“…Unlike them, we focus on B2B relationships-based on bilateral negotiation and Nash bargaining-and relate our findings to both the allocative power of prices and the performance of the model in general equilibrium. Previous contributions on the macroeconomic effects of B2B relationships include Mathä and Pierrard (2011), Drozd andNosal (2012), andHeise (2019). Mathä and Pierrard (2011) are mostly interested in business cycle dynamics and find that B2B relationships can give rise to hump-shaped responses of variables to shocks.…”

“…We instead add an intensive margin of trade and emphasize its role as well as that of the distribution of the markup, which arises from two-sided search. Heise (2019) studies the pass-through within importer-exporter relationships, and his ultimate objective is to connect pass-through with the life cycle of B2B relationships. To this end, he presents novel empirical results and models an individual B2B relationship to explain them.…”

Identifying foreign suppliers in U.S. import data

“…Indeed, the existence of such “two‐sided” data has the potential to establish novel facts about traders that can augment the heterogeneous firm framework widely used throughout the literature (Melitz, ). To the best of our knowledge, two‐sided trade transactions data has been analyzed for Colombia (Benguria, ), Chile and Colombia (Blum, Claro & Horstmann, ), Costa Rica, Ecuador, and Uruguay (Carballo, Ottaviano, & Martincus, ), Norway (Bernard, Moxnes, & Ulltveit‐Moe, ), and the United States (Pierce & Schott, ; Dragusanu, ; Eaton, Eslava, Krizan, Kugler, & Tybout, ; Monarch, ; Kamal & Sundaram, ; Heise, ; Monarch & Schmidt‐Eisenlohr, ).…”