Relational Contracts and Development

Abstract

This article reviews an emerging body of evidence on relational contracts, defined as informal arrangements sustained by the value of future interactions. We focus on developing and international markets, which are often characterized as contexts with weak formal contract enforcement. We introduce relational contracting between firms as a governance form alternative to both firms and markets. We then review evidence on the prevalence of long-term relationships between firms and discuss why this governance form might be particularly common in developing countries. After introducing a simple framework, we discuss the measurement of relational contracting between firms. We review an approach that takes dynamic incentive compatibility constraints to the data to quantify the value of future interactions and illustrate how different types of shocks can be used to uncover the inner functioning of relational contracting. We also review structural models and conclude with policy implications and promising avenues for future research.

Corporate Social Responsibility along the global value chain

“…There is a recent and quickly expanding literature on relational contracts in developing countries surveyed inMacchiavello (2021), which supports our notion of the relevance of incomplete contracts in sourcing relationships between firms Casaburi and Macchiavello (2019). show how imperfect contract enforcement generates barriers to entry in the Kenya diary sector Machiavello and Morjaria (2021).…”

The motivating effect of monetary over psychological incentives is stronger in WEIRD cultures

“…Why might certain exchange norms and psychological contracts become more widespread in a society? According to some scholars, their prevalence is best explained by institutional factors 60 . For instance, in non-WEIRD cultures, legal mechanisms such as courts tend to be less effective.…”

“…Of course, not all employment relations are governed solely by norms of market exchange in WEIRD cultures and norms of reciprocity exchange in non-WEIRD cultures. Rather, people from all cultures can apply different mental models of exchange norms and psychological contracts on the basis of the features of a situation, including in economic transactions 60 , 72 – 76 . Nevertheless, cultural and institutional influences can make people more likely to interpret a situation as either transactional or relational by increasing the salience of a mental frame that is ‘consistent with what is likely or what ought to happen between employee and employer’ 56 .…”

Empirical Industrial Organization Economics to Analyze Developing Country Food Value Chains

“…Michler & Wu (2020) provide an excellent review of the nascent empirical literature, with a particular emphasis on themes and applications directly relevant to agricultural economists. Macchiavello (2022) offers a complementary review emphasizing methodological issues and implications for developing countries. We suggest that interested readers read these reviews.…”