The Economics of Relational (Social) Capital: Exploring the Value of Exchange Relationships in Industrial Procurement

Organization scholars have highlighted the value of relationships in fostering effective exchange, yet the empirical evidence supporting such claims remains largely indirect. We directly measure the value of ongoing relationships between suppliers and a large buyer, using the buyer’s choices in internet-enabled reverse auctions to estimate the degree to which stronger relationships with suppliers increase its willingness to pay for standardized commodity parts. This setting permits us to focus more sharply on the anticipated benefits generated by pre-existing relationships, while minimizing the confounding influence on partner selection that social attachments associated with these relationships may generate. Our empirical analysis suggests that repeated interaction between firms leads to the formation of relational assets that share a number of properties with physical capital. We thus label these assets “relational capital.” We find evidence that suggests that both social attachments and incentive considerations underpin the value of relational capital. Further, we find that relational capital exhibits more value in some settings than in others and that it exhibits diminishing marginal returns.

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