Relationships and Contracts
As in Chapter 3, my purpose here is to develop concepts which are applied in later chapters. Firms establish many different kinds of commercial relationships. The most common is the spot contract--an agreement for immediate exchange. But many important relationships are made as classical contracts--long-term, legal agreements which contain detailed provisions as to how dealings between the parties will evolve as events unfold. A relational contract is also a long-term relationship. But its provisions are often only partly specified and it is enforced, not by legal process, but by the need the parties have to go on doing business with each other.
Sometimes one of these contract forms is appropriate, sometimes another. Long-term contracts are necessary when both parties must make specific commitments to the relationship. But there are many cases where such commitments are necessary but the critical terms of an agreement cannot be enforced by the courts. This is most often true when timely flows of honest information between the parties are essential or where flexible response is required in circumstances which cannot be fully anticipated. Here relational contracts come into their own. Marriage is a long-term contract, but best conducted as a relational one, and the same is often true in business dealings. Some business environments are conducive to relational contracting. Others allow or encourage opportunistic behaviour. These differences between firms, and between commercial cultures, are important to the nature of competitive advantage in firms and nations.
Most business relationships are made on the basis of spot contracts. I sell, you buy, and that is that. We might, or might not, engage in a similar transaction next week, or next year. Spot contracts are easy to make and cheap to transact. Spot contracts do not need lengthy negotiation. Nor are expensive lawyers called to draft their provisions. Spot contracts are based on standard terms and take place at market prices.