RELATIONAL CONTRACTS AND THE THEORY OF THE FIRM

RELATIONAL CONTRACTS AND THE THEORY OF THE FIRM

Relational contracts—informal agreements sustained by the value of future
relationships—are prevalent within and between firms. We develop repeated-game
models showing why and how relational contracts within firms (vertical integration)
differ from those between (non-integration). We show that integration affects the
parties’ temptations to renege on a given relational contract, and hence affects the best
relational contract the parties can sustain. In this sense, the integration decision can be
an instrument in the service of the parties’ relationship. Our approach also has
implications for joint ventures, alliances, and networks, and for the role of
management within and between firms.