Contractual Functions and Contractual Dynamics in Inter-Firm Relationships: What We Know and How to Proceed
University of Paderborn Working Paper No. 88
41 Pages Posted: 23 May 2006
Date Written: January 8, 2006
Research on the organization of inter-firm relationships has recently moved away from the discussion of equity- vs. non-equity-based forms of governance, turning now towards the examination of contractual design. However, empirical research on the contractual complexity of inter-firm relationships to date delivers a puzzle with contradicting findings. We claim that a disaggregate analysis of different contractual functions helps to overcome the identified inconsistencies. Thus, we conduct a comprehensive review of 22 top journals based on the methodology of David and Han (2004) in order to systematically assess the empirical evidence on the functions of contracts. Our review covers more than twelve years of studies, taking the landmark article of Parkhe (1993) as starting-point. In essence, our paper offers three main contributions to advance current research. First, we propose that inter-firm contracts serve three distinct functions, namely 'safeguarding' of the parties' investments, 'coordination' of the exchange process, and 'contingency adaptability' to cope with future disturbances. Second, we further disentangle the effects that experience gained from prior relationships has on contracts since researchers have raised contrary hypotheses on the impact of prior relationships, according to diverging foundations in trust- vs. learning-related theoretical models. Finally, we develop some research propositions on transaction- and experience-related determinants of the three contractual functions. In particular, we claim that experience gained from prior relationships has different effects on 'safeguarding' and 'contingency adaptability' as compared to the 'coordination' function of contracts.
Keywords: contracts, alliances, experience
JEL Classification: M10, M20
Suggested Citation: Suggested Citation