Districts on the verge of an organizational breakdown: the Flexibility versus Cooperation trade-off

Recent year witnessed the emergence of serious threats to the industrial districts model in Italy and in other developed countries due to the increasing relevance of international competitors with lower production costs. The reaction to such a threat has been twofold: on the one hand most Italian producers have focused their production on the highest part of the quality ladder (limited quantities for sophisticated consumers), on the other hand several districts have radically transformed their organizational structure moving from a flat, “fully-connected”, local structure to a more hierarchical less dense structure, where local relations are sometimes dropped in favour of international outsourcing of basic production phases. The role of major firms within the district has increased in such a way that sometimes it is doubtful that we can still speak about an industrial district since, traditionally, the main strengths of this peculiar form of organization of production lies in the capability of many firms to cooperate/coordinate while staying autonomous and not merging in a unique large corporation. Such a strength is based on the stability of the relationships between the different subjects, which allows to develop localized social capital as generalized expectations of cooperation. This situation is increasingly threatened by the option of acquiring new and (in some respect) more efficient partners outside the district (and indeed also beyond the national borders), which the fittest firms take advantage of in an progressively more integrated world economy. Even the mere possibility of this happening can dissipate a significant amount of localized social capital. The shift from the traditional industrial district towards a more integrated organizational setting, with larger, fewer subjects. would therefore trade-off flexibility for cooperation. We explore such a trade-off by modelling the interaction of independent firms within an industrial district as a repeated game of trust, where cooperative outcomes are not due to the cultural attitudes of the players, but the result of non-cooperative behaviour taking place in a stable organizational setting. When the outside option of changing partners is not too attractive, cooperation may arise also without ties between firms; when such attractiveness increases, cooperation may only be guaranteed by stabilizing the relationship through a formal commitment. Such a “defensive strategy” can be shown to be socially efficient as long as the efficiency gain of changing partners is not too large, when leaving the firms free to change becomes socially optimum.