Relational Contracts and the Theory of the Firm

41 Pages Posted: 11 May 1997

See all articles by George P. Baker

George P. Baker

HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)

Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Date Written: December 29, 1997

Abstract

We combine Simon's conception of relational contracts with Grossman and Hart's focus on asset ownership. We analyze whether transactions should occur under vertical integration or non-integration, and with or without self-enforcing relational contracts. These four models allow us to re-run the horse race Coase proposed between markets and firms as alternative governance structures, but with four horses rather than two. We find that efficient ownership patterns are determined in part by the relational contracts that ownership facilitates, that vertical integration is an efficient response to widely varying supply prices, and that high-powered incentives create bigger reneging temptations under integration than under non-integration.

Note: this paper was formerly titled "Implicit Contracts and the Theory of the Firm"

JEL Classification: D21, D23, D81, D82

Suggested Citation

Baker, George P. and Gibbons, Robert S. and Murphy, Kevin J., Relational Contracts and the Theory of the Firm (December 29, 1997). Available at SSRN: https://ssrn.com/abstract=2211 or http://dx.doi.org/10.2139/ssrn.2211

George P. Baker

HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6119 (Phone)
617-496-4191 (Fax)

HOME PAGE: http://www.people.hbs.edu/gbaker/index.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin J. Murphy (Contact Author)

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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