Many economies have seen growth in industrial clusters during their industrialization, and the relational contracts between manufacturers and subcontractors are often the organizational basis of clusters. We predict that, if manufacturers form relational contracts with subcontractors and if manufacturers closely collude when trading with subcontractors, then premium subcontractors suffer more from market volatility than ordinary subcontractors and hence it is optimal for manufacturers to shield

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... premium subcontractors against the risk. We then study Kiryu, a kimono weaving cluster that expanded from the late nineteenth century with the development of new synthetic dyeing techniques. We show that premium subcontracting weavers were allowed long-term relational contracts and specialization, which shielded already honest weavers against market volatility and induced them to be diligent and to acquire skills.