The Value of Relationships: Evidence from a Supply Shock to Kenyan Flower Exports

Abstract

Enforcement problems, insurance considerations and uncertainty over trading parties are salient features of real-life relationships between firms. We develop tests to empirically distinguish between different models of relationships and, using data on Kenyan rose exports, show that 1) the value of the relationship for the seller increases with the relationship's age; 2) during a negative supply shock sellers prioritize the most valuable relationships; and 3) compliance at the time of the shock positively correlates with future survival, orders, prices and relationship value. The evidence is consistent with sellers valuing a reputation for reliability and rejects models exclusively focusing on enforcement or insurance considerations. (with Ameet Morjaria)