Dynamics of Firm: Supplier Relationships in a Less Developed Economy: Evidence from African Manufacturing Firms

In this paper, we study supplier--firm interactions to explain firmsʹ outsourcing relationships. We show that in an imperfect information setup a firm learns about the quality of its suppliers through repeated interaction. As the firm determines the suppliersʹ quality with greater precision, it gives a greater proportion of its contracts to these "better" suppliers. We report evidence from African manufacturing firms that is consistent with our hypothesis: both frequency and volume of transactions increase with the length of a firmʹs relationship with its supplier. These effects are stronger in poor contracting environments.