Relational Contracts and Managerial Delegation: Evidence from Foreign Entrepreneurs in Russia

Abstract

We examine the managerial delegation decisions of foreign entrepreneurs, and assess how these decisions are shaped by characteristics of the local product and labor market environment. We argue that actual or perceived home bias in court proceedings leads foreign entrepreneurs to place little reliance on formal contracts in their dealings with local agent managers. Adopting the lens of relational contract theory, we develop hypotheses linking managerial delegation decisions to market conditions associated with stable self-enforcing agreements, and test the hypotheses in the context of post-Soviet Russia. Consistent with our arguments we find that foreign entrepreneurs are more likely to hire an agent manager in local markets where industry growth creates a substantial ‘shadow of the future,’ where managers’ outside employment options are relatively limited, and where competition and the variability of returns are not so high as to induce defection from an informal agreement. Similar observations on a sample of Russian-owned entrepreneurial firms suggest that these delegation decisions are relatively insensitive to local market conditions, but are influenced by the density of local reputation networks. Our study thus contributes to understanding of the distinctive features of foreign entrepreneurs’ managerial delegation decisions, and reinforces the view that contracting impediments constitute one important aspect of the ‘liability of foreignness’ for entrepreneurial firms.

Keywords: relational contracts, entrepreneurs, managers, agents, agency problems

JEL Classification: M13, F23, L14, J41