Strategic Management Meets the Economics of Relational Contracts

Abstract

For many firms, designing governance structures for their inter-organizational relationships is a key strategic challenge. Strategic management and other management scholars have successfully applied concepts from sociology, economics, and organization theory to analyze this challenge. Despite their attention to the relational dimension of governance, however, these scholars have drawn very little from a stream of economics research that directly addresses relational governance and has become established in that field: namely, the economics of relational contracts. In this essay, we discuss what the economics of relational contracts can add to management studies of the governance of interorganizational relationships. We explain how the economics of relational contracts sheds light on the relative roles of, and interactions between, the shadow of the past and the shadow of the future in supporting interorganizational collaboration. In so doing, we suggest how economic models of relational contracts can radically change the interpretation of observations that management scholars have made about collaborative relationships they have studied. We also show how the economics of relational contracts literature can contribute to the extended debate about whether and when contracts are substitutes or complements for unwritten agreements. Finally, we discuss implications for the ways in which the economics of relational contracts can help us to better understand the governance of inter-organizational relationships.

Keywords: Relational governance, contractual governance, relational contracts, strategic management, economics