Relational contracts

... Tel: 01524-593908 E-mails: s.mouzas@lancaster.ac.uk; keith.blois@btinternet.com ... transactor who reneges would suffer from a loss of reputation and it has been argued that the value of each transactor's reputation can be thought of as delineating what Klein and Nevin call “the ...

This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the

Many studies have been carried out in relation to construction procurement methods. Evidence shows that there needs to be a change of culture and attitude in the construction industry, moving away from traditional adversarial relationship into cooperative and collaborative relationship. At the same time there is also an increasing concern and discussion on alternative procurement methods, drifting away from traditional

The contractile response of intestinal strips in rainbow trout (Oncorhynchus mykiss Walbaum, 1792) to the administration of histamine was assessed by means of the organ bath technique. Intestinal strips were isolated from 16 clinically healthy fish and mounted in organ baths. Histamine was compared with the full agonist serotonin, to evaluate their contractile efficacy and potency. Serotonin elicited a concentration-related contraction in all examined intestinal strips, whereas histamine induced the contraction only in 14 exemplars. Of these, seven exhibited a concentration-related response. A sigmoidal curve was fitted from data (R(2) = 0.55) and its best fit values were compared with those of serotonin. Interestingly, histamine exhibited the same efficacy (E(max)) as serotonin (F-test, p > 0.05), but showed lower potency (by an order of magnitude) (F-test, p < 0.01). Moreover, the effect of the H1 antagonist, pyrilamine, has been tested to exclude aspecific contraction due to other agonists eventually released in situ following histamine administration. Pyrilamine showed a marked concentration-related antagonist action on the contractility induced by histamine with complete contractility antagonism at 10(-4)M. The authors suggest that the responses to histamine measured in the present study reflect a less sensitive response to an exogenous source of histamine, possibly due to bacterial metabolism.

Scholarly work on contracts offers a valuable lens through which exchange relationships among companies or individuals can be studied. Contracts may regulate business alliances, strategic partnerships or collaborations among parties. The nature and form of contracts have been investigated by a number of academic disciplines each of which has adopted a different approach. Much of this work has been of a theoretical nature and it is often referred as ‘relational contract theory’. This paper considers two theoretical approaches to ‘relational contracts’. The first theoretical approach to relational contracts is described as the ‘normsbased’ approach, while the second is that of a group of organizational economists and is often referred as the ‘incomplete contracts’ approach. In comparison only a limited number of empirical studies have been undertaken. This paper will set out the findings of these two major streams of theoretical analysis of contracts and then contrast them with recent...

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

To what degree are rolling, or layered, contracts binding? A number of courts, starting with the now infamous case of ProCD, Inc. v. Zeidenberg, have held that, rather than a contract for the sale of a good, such as a computer, being completed in-store, the contract is formed when deferred terms found inside the package are reviewed by the buyer and accepted by some act -- usually use of the good (or declining to return it). This approach, which has been called the rolling contract, has been widely criticized by commentators as an abomination of contract law that ignores a true application of the Uniform Commercial Code (“UCC”) as well as the spirit of that code. The approach is not without its allure, however, as it permits contracts to be formed in an efficient manner that may very well appeal to consumers and merchants alike. However, too strict of an adherence to the approach threatens to impose terms upon parties that they never expected or agreed upon. But the opposite is also true -- too strict of an adherence to traditional roles of offer and acceptance threatens to displace terms that were contemplated and not objectionable to the consumer. Thus, rather than relegating the rolling contract approach to a dark corner of contract law in favor of a more traditional approach, this article proposes that the rolling contract should be rehabilitated.

Existing contract law does a good job of defining contract offers. However, what is the trickier issue, particularly when a transaction involves an initial oral component, is identifying when the offer is actually made. In other words, when is it fair to say that an offer is made in-store by the buyer, and when is it fair to say that the in-store interaction is nothing more than a preliminary event to the actual offer, which comes later when the buyer gets home and opens the product? Legal realism, which was a foundational principle driving the drafting of the Restatement (Second) of Contracts, as well as the UCC, may offer some insights into how to approach the rolling contract theory. But so may a more recent approach to contract law -- the relational contract approach. Relational contract theory, which essentially treats contracts not as isolated events but ongoing relationships, provides a useful way of making this determination.

Relational contract theory has its roots in the writings of Ian Macneil who believed most contracts were rarely, if ever, fully thought-out and expressed representations of the parties’ obligations. It would therefore seem to be a logical extension of both legal realism and relational contract theory that certain situations exist where the parties expect that a contract has not been fully formed in the store, but rather further terms, i.e., the formal “offer,” will come later. If parties to a contract know that there is more to the contract than simply the price and the good, then it should come as no surprise that more terms are to come, or that a more detailed offer will be forthcoming. Thus, in some scenarios, it is perfectly reasonable to assume that the contract has not been formed in-store, but rather a deferred offer will come later. Thus rolling contract theory can be explained under a legal realism approach, as influenced by a relational approach; however, this is not to say that all contracts are now subject to the rolling contract approach. As this article explains, some contracts really are formed at the point of contact under a relational contract approach. The challenge to the courts is to determine which will be which. This article describes how legal realism and the relational contract theory can be used to explain the rolling contract approach and makes suggestions for how this relational contract theory can be used to aid courts in determining which contracts involve a rolling or deferred offer.

This paper provides experimental evidence of the economic impact from shifting bargaining power in relational contracts. I implement an experimental design that adjusts the bargaining power of sellers (agents) and the enforceability of the contract. I find that the vast majority of ...

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.

We apply the idea of relational contracting to a simple problem of regulating a single-product monopoly with unverifiable (then ex ante not contractible) quality. We model the interaction between the regulator and the firm as an infinitely repeated game; we observe that there exist self-enforcing contracts in which the regulator, using her discretionary power on the price (the contractible variable) can induce the firm to produce the required quality level by leaving it a positive rent. When players use grim trigger strategies, the optimal self-enforcing contract implies a distortion from the second best which is greater the more impatient is the firm and the larger is the effect of the price on the deviation profits. Whenever the equilibrium profits of the static game are strictly positive, even if the firm were infinitely patient, the optimal contract would not reach the second-best: it would ensure a quality-adjusted Ramsey condition and, at the same time, leave positive profits ...

This paper describes collaboration efforts of a project team that implemented lean concepts in the course of structural system selection during the design phase of a hospital project. Out-of-the-box thinking, contractual incentives for team work, early collaboration, and a set-based design approach led to the development of an innovative and cost-effective structural system that may set precedent for other medical facilities to be constructed in seismically active zones. The structural design team on this project rigorously explored the design space and tested design alternatives against project value propositions. When pushed by the owner to think more broadly, the structural engineer proposed using a new technology, namely viscous damping walls. This concept was developed in Japan but has not yet been tried on projects in the United States. Because it is a first, this solution requires not only rigorous analysis and testing by the structural engineer but also detailed investigatio...

This study explores the effects of governance structure and contracting out on municipal audit costs. There is economy of scale, asymmetric information and human asset specificity in municipal auditing. As a consequence, both unified governance and market contracting could result in high total audit costs for municipalities. According to Oliver Williamson, relational contracting has been a neglected issue in transaction costs analysis (TCA). We studied 47 municipalities in Finland and 298 municipalities in Norway using multivariate analysis. The municipal audit fees per capita were highest in Norway where the municipal audit market was regulated and had virtually no market contracting. The audit fees per capita increased most in Finland, possibly due to lowballing after the Finnish market was deregulated in 1997. The municipalities in both Finland and Norway predominantly used audit in relational contracting even though the audit fees per capita were relatively high. Relational contracting could be efficient when production, transaction and political costs are taken into account. The findings corroborated several core TCA propositions.