Abstract:
This paper explores the importance of ethnic networks in determining the outcome of business
transactions in Small and Medium Enterprises sector. In a situation of hold up1 the degree of trust
between the business parties will affect the willingness to enter into an agreement with each other.
If a wholesaler gets a product customized and then the buyer does not come back to collect the delivery; the value of the products becomes less than the market price. In our study, auditors from different ethnicity purchase either a customized or non-customized product for delivery at a later date. Auditors were asked to adhere to a script and a predefined bargaining process.
The analysis of the data shows that ethnicity plays a critical role in determining the fate of a business transaction. A match in the ethnicity of both the parties impacts the bargaining process and subsequently affects the contracted price. These results suggest that ethnicity of parties involved in a contract plays an important role in determination of the contractual features.
This paper has been authored by Antoinette Schoar, Raj Kamal Iyer , Sandya Kumar and has been contributed by IFMR-SEFC for research and scholarly purposes.
