Academic Symposium | Relational Contracts: Theory and Practice

The first day will feature academics in conversations with executives from many industries exploring the contracting problems they face and novel solutions they have devised. The second day will have three panels, one focusing on the work of each of the sets of scholars. The papers will not be presented as participants will read them in advance. Rather, two short comments will be offered on each set of authors, one by an economist and the other by a legal academic. The day will conclude with a discussion led by Luigi Zingales, Tim Cummins and Chad Syverson on the implications of the proceedings for the theory of the firm.

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The study of relational contracts began with the pioneering work of Stewart Macaulay and Ian Macneil. Although these authors eschewed economics, the past decades have seen a burgeoning interest in the subject from both economists and legal scholars writing in the law and economics tradition. The goal of this online gathering is to further our understanding of relational contracts by bringing the business and legal people who draft, perform, and enforce them into a conversation with leading academics to see what theory can learn from real-world practices and what the real-world can learn from theory.

To focus our inquiry, we will look at three recent perspectives on relational contracts. We will draw on them to organize a conversation that can help advance the effort (on the level of both theory and the design of research projects) to better understand the mechanisms of effective contract governance.

The first perspective was developed by Oliver Hart, David Frydlinger and Kate Vitasek who put forth a new type of contract—the formal relational contract—that they view as an effective way to overcome the problems of contractual incompleteness, particularly in complex transactions. This approach highlights the importance of aligning perspectives as well as building trust and understanding during contract negotiation. It also suggests that contracts contain a legally binding obligation to act in accordance with six contracting norms—reciprocity, autonomy, honesty, integrity, loyalty and equity—to induce the parties to respond cooperatively to the inevitable problems arising from contractual incompleteness.

The second perspective, developed by Lisa Bernstein and Brad Peterson in the context of contracts between large integrated product manufactures and their suppliers of components (but present also in a number of other contexts), focuses on the ways that contracts between firms have come to incorporate a set of provisions—termed managerial provisions—that are analogues of the intra-firm management techniques explored in the World Management Survey. Although these managerial provisions are formal, clear, and detailed, they are not meaningfully legally enforceable, making them a species of formal relational contract, but one quite different from that described by Hart et al. These governance a more powerful force, and foster the growth of inter-firm and interpersonal trust.

The third approach was developed by Robert Gibbons and Rebecca Henderson. It looks at relational contracts within firms of different types from white collar firms to blue collar firms to salespeople on the Nordstrom floor (but the argument applies to relational contracts between firms as well as those within). Motivated by management practices that are known to be value-creating but do not diffuse to all firms that could benefit from them, this approach focuses on the role of “clarity” (in addition to the standard game-theoretic consideration of “credibility”) in allowing parties to develop relational contracts, suggesting that for many important relational contracts clarity cannot be instantaneously produced but instead must emerge through shared experience, and that interactions between (lack of) clarity and (lack of) credibility may cause attempts to develop relational contracts to founder.

Together these papers focus attention on contractual incompleteness both across and within firms and how these two sets of incomplete agreements (whose formal terms increasingly converge) interact. During our time together will consider the implications of these and other perspectives for relational contracts, contract governance and the theory of the firm.

On the first day, panels of three academics joined by others present will interview business executives, supply chain managers, lawyers working with particular types of contracts (tentatively manufacturing, pharmaceutical development and manufacturing, and business process outsourcing) and others tasked with the design and implementation of contracts with a view towards understanding how these transactions play out on the ground and how real-world actors view the building blocks of the ideas developed by the academics.

The second day starts with three sessions, one on each of the academic perspectives set out above. The papers will not be presented. Rather, the discussion will be kicked off by two 5 minute comments. The fourth session, led by Luigi Zingales, will be a discussion of the implications of the papers for the theory of the firm. We will conclude with a conversation about research yet to be done.

Confirmed Academic Participants

Confirmed Business/Legal Participants