Relational Contract Theory

This paper investigates how contract structure influences inter-firm dispute resolution processes and outcomes by examining a unique dataset consisting of over 150,000 pages of documents relating to 102 business disputes. We find that the level of contract detail affects the type of dispute resolution approach that is adopted when conflict arises, and that different approaches are associated with different costs for resolving the dispute. We also find that the effect of contract choice on dispute resolution approach is moderated by the degree of coordination required in the relationship, and that the effect of dispute approach on costs is moderated by the degree of power asymmetry between the parties. Thus, even after controlling for various attributes of the exchange relationship and the dispute, the choice of contracting structure has important strategic implications.

We study the e¤ects of envy on the feasibility of relational contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which re‡ects the agent’s individual contribution to …rm value. Both agents exhibit disadvantageous inequity aversion. In contrast to the literature, we …nd that inequity aversion may be bene…cial: In the presence of envy, for a certain range of interest rates relational contracts may be more pro…table. Furthermore, for some interest rates reputational equilibria exist only with inequity averse agents.

In a generation's time, collaborative methods of innovation have become a centerpiece of modern economic organization. Rather than creating technology primarily in-house, companies often enter into complex contractual arrangements whereby innovation processes cross firm boundaries. This collaborative approach gives a firm access to external expertise without executing a full acquisition. Collaboration poses a puzzle for theories of economic organization. On one hand, uncertainty is significant when firms are jointly creating new technology, which makes formal contracts highly incomplete. On the other hand, innovation networks often appear too dynamic and heterogeneous for the typical prerequisites for informal constraints to readily obtain. How then are innovation networks governed? In an important series of articles, Ronald Gilson, Charles Sabel, and Robert Scott argue that collaborating firms have devised a new variant of relational contracting to govern their joint efforts. This new governance form carefully blends formal agreements with

We study the e¤ects of envy on relational employment contracts in a standard moral hazard setup with two agents. Performance is evaluated via an observable, but non-contractible signal which re‡ects an agent’s individual contribution to …rm value. Both agents exhibit horizontal disadvantageous inequity aversion. In contrast to the literature, we …nd that inequity aversion may be bene…cial: In the presence of envy, for a certain range of interest rates relational contracts may be more pro…table. For some interest rates reputational equilibria exist only with envious agents.

In a generation’s time, collaborative methods of innovation have become a centerpiece of modern economic organization. Rather than creating technology primarily in-house, companies often enter into complex contractual arrangements whereby innovation processes cross firm boundaries. This collaborative approach gives a firm access to external expertise without executing a full acquisition. Collaboration poses a puzzle for theories of economic organization. On one hand, uncertainty is significant when firms are jointly creating new technology, which makes formal contracts highly incomplete. On the other hand, innovation networks often appear too dynamic and heterogeneous for the typical prerequisites for informal constraints to readily obtain. How then are innovation networks governed?In an important series of papers, Professors Gilson, Sabel, and Scott argue that collaborating firms have devised a new variant of relational contracting to govern their joint efforts. This new governance...

The Responsibility to Protect is the acknowledgement by the international community of States that the current modes of international law cannot solve-let alone palliate-the question of mass atrocities. The Responsibility to Protect is a strong argument in favor of opposition groups. It influences institutions of intervention, recognition and diplomacy, and prompts us to conceptualize international law under a new theory. Whether the Responsibility to Protect will be transformed into a norm of international law is a moot question. Nevertheless, the Responsibility to Protect may find its place in the toolkit of opposition groups-the perennial underdogs of international law.

SUMMARY IN ENGLISH

DISTANCED CLOSENESS:
A STUDY OF THE IMPORTANCE OF THE RELATIONS BETWEEN BOARD AND MANAGEMENT FOR ACTUAL BOARD BEHAVIOR

The role of the board of directors has in recent years received increased attention, but research about directorates is still embryonic (Pettigrew 1992). Board-management relations are, however, the area being the most studied. This study focuses on the apparent paradox that the board  will  be most  effective when there is simultaneous distance  and  closeness  in  board-management relations  (Huse  l993d).

Theory and proposals (chapter 2 and chapter 3)
According to agency theory predictions, the board needs to be independent of management (distance) in order to be an effective control mechanism for shareholders (Kosnik 1987). Based on predictions from theory of contractual relations (Macneil 1980) the board will be most effective when there are relational norms and closeness in board  management  relations.  When considering distance as an input attribute and closeness  as a process  attribute, it was possible to suggest a solution to the apparent paradox of simultaneous distance and closeness (Demb and Neubauer 1992), and three proposals were elaborated.

Pl Distance will be positively related to  board  effectiveness (agency theory argument)
P2 Closeness will be positively related to board  effectiveness (theory of contractual  relations  argument)
P3 Boards with distanced closeness (simultaneous distance and closeness) will be most effective (argument based on the synthesis  solution).

Methodology  (chapter  4)
In a dyadic empirical  cross sectional field survey of hotels in Norway and Sweden with a theory testing design, hypotheses drawn from these proposals were tested. All hotels had dual leadership, that is, the position of CEO was separated from the position of board chairperson. The sample consisted of 75 firms with responses from both CEOs and board chairpersons. This is 58% of 129 firms meeting the population definition criteria according to a screening phase.

Variables (chapter 5)
A stakeholder approach was used to define board effectiveness by the board's actual involvement in control (KON-ownership perspective) and service roles (SER-managerial perspective) (Huse 1993b). Evaluations from multiple respondents and multiple items were used to measure the study's main variables.

While most research focus on board composition when considering board independence (a review of recent research is found in appendix, see also Huse (l 993d)), this study also used an independence measure related to the board members' internal incentives (Hermalin and Weisbach 1991). Although allowing management to choose their own board might seem on a par with letting the fox guard the chicken coop, there are reasons to think that board members will exhibit some independence from management. Board mcmben have legal obligation to shareholders and other stakeholders, and they could be held liable for damages if they fail to meet these obligations. Board rncmben may also have incentives in maintaining and developing reputation as competent business people (Fama and Jensen 1983). The variable measuring independence related to board composition was called UAV (Huse 1993a), while the vanablc measuring independence related to internal incentives was called INC (Borcb and Huse 1993).

The variable measuring closeness was derived from Macneil's relational norms (Macneil 1980; Huse 1993a). This project is one of the first studies operationalizing these norms of role integrity, preservation of the relation, harmonizing of relational conflict and supracontract norms. After a validation process of the variables, the norm of role integration was excluded from the reflective index called REL.  All variables are presented in table 5.6.

Analyses (chapter 6 and chapter 7)
Totally ten hypotheses and two alternative hypotheses were tested in chapter 6. Summary of the results are found  in table 6.2 and table 6.6. The results indicated support for the proposals when using an incentive (INC) definition of independence. Chapter 7 introduced some additional analyses of the hypotheses based on time lags (Baysinger and Butler 1985), earlier financial crises (Hermalin and Weisbach 1988), company performance measures of effective­ ness, dyadic analyses, etc. The additional analyses did not change the overall results.

Contribution  and future research  (chapter 8)
The results of the study are discussed in chapter 6, chapter 7 and chapter 8 (see also Huse 1993a, 1993h, and Borch and Huse 1993). The project has mainly theoretical contributions. These contributions are related to the attempt  to integrate different theories about board management relations, making operationalizations of constructs from agency theory and theory of contractual relations, and the empirical testing of hypotheses based on these theories.

This project has also a contribution by the study of actual board behavior in small and medium sized firms. The study has researched into relational dynamics and processes in between the inputs and the outputs studied in most other studies of the role of directorates.

In relation to this study, future research might take three directions. These directions are theory testing research with causal designs, replicative studies in other industries and other countries, and studies exploring processes inside and outside the boardroom.

In this paper, I compare the feasibility and the profitability of group vs. individual performance pay when workers are envious and when verifiable signals on the workers’ performances are not available. The group bonus contract is superior as long as the principal faces no credibility problem. This is due to the fact that group performance pay avoids the occurrence of inequity. However, the relational individual bonus contract may become dominant although it introduces the prospect of unequal pay. The reason is that precisely the worker’s distaste for wage inequity may actually soften the principal’s credibility constraint.