Center for the Study of Energy Markets

Production in many industries, such as construction and heavy manufacturing, relies on inputs from both lead firms and contractors. These firms’ joint productivity often hinges on their ability to share information and coordinate activities, suggesting that they have strong incentives to learn about each other’s personnel, procedures, and expertise. This learning differs from standard learning-by-doing in that it is relationship-specific: its benefits are not appropriable outside the relationship in which the learning takes place. In this paper, I empirically examine the importance of relationship-specific learning using high-frequency data from oil and gas drilling. I find that the joint productivity of a lead firm and its drilling contractor is enhanced significantly as they accumulate experience working together. This result is robust to other relationship specificities. I also find that firms appear to recognize the benefits of joint experience: controlling for other specificities, lead firms are more likely to work with contractors with which they have substantial prior experience than those with which they have worked relatively little.