Buying Products from Whom You Know: Personal Connections and Information Asymmetry in Supply Chain Relationships

This study investigates whether the ability of executives to mitigate information asymmetry via interpersonal connections can affect the formation and the contractual terms of customer-supplier relations. We find that both educational and past work-based personal connections increase the likelihood of a potential supplier (hereinafter: vendor) becoming an actual supplier (hereinafter: supplier). The magnitude of the effect varies with the executive’s influence on supplier selection. Personal connections grow in importance when information asymmetry between the vendor and customer increases. Personal connections also affect contractual terms, including the contract duration, between the customer and the selected vendor. Finally, transacting with a personally connected supplier can mitigate supply chain interruptions and improve customer performance.