Business partners - suppliers and clients - are central to the efficient functioning of firms. However, due to matching frictions, including lack of information and lack of trust, business relationships may not form efficiently. High-quality firms may be stuck with low-quality suppliers, or with too few buyers, and may not be able to grow to reach their potential. Conversely, low-quality firms, when their suppliers or clients have few alternatives, may inefficiently survive or grow. Thus, matching frictions in the supply chain can act as a growth barrier. To understand this growth barrier, Cai and Szeidl use a field experiment with 800 firms in China to evaluate the impact of referring business partners on firms in the industry producing the Chinese writing brush.
This project will first identify good candidate partners for firms using rich network data collected as part of two other PEDL projects (read more about them here and here), and then make referrals between the firm and the candidate partner. Two treatment arms are used to distinguish lack of information from lack of trust as the mechanisms through which referrals successfully connect firms and candidate partners. In the first arm, firms only get information about the potential partner, while in the second they also get a sizeable subsidy for a first transaction. The researchers measure impacts on businesses' network: on subsequent transactions with the candidate partner, on self-reported satisfaction with business partners, on replacement of pre-existing partners, and on finding new partners complementary to the referred partner. They also measure impacts on firm outcomes, including spillovers of product quality. The results will provide evidence on the presence, magnitude, and mechanism of matching frictions.
The results of this project will impact policy through established relationships with local government officials and key government departments, which design and implement policies to promote firm growth. If results indicate that referring business partners improves firm outcomes, the policy implication is that communication platforms such as fairs, and/or contact information of upstream/downstream firms should be provided. If the results suggest a lack of trust is the main barrier, then offering communication platforms that provide repeated opportunities for firms to interact with each other, or having a third party such as the pen brush production association act as guarantor, could help remove the barrier.
