Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts

Abstract

The master agreements that nominally govern the transactions between mid-western OEMs and their suppliers are not, for themost part, designed to create legal obligations. Rather, like the roleplayedbyfirmboundaries in theCoase-Williamson theory of thefirm, they create a space in which private order can flourish. This article explores how sophisticated transactors in this market have combined governance techniques associated with arm’s-length contracting, intra-firm hierarchy, and trust-based relational contracting to create relationships that are long-term, highly cooperative, and characterized by significant relationship-specific investment. It suggests that these transactors have been able to accomplish these outcomes with only minimal reliance on the legal system, in large part because they operate in a market of highly interconnected firms—a network that itself functions as a contract governance mechanism. It then explores the * Wilson-Dickenson Professor of Law, and Aaron Director Research Scholar, The University of Chicago and International Research Fellow, Said School of Business, Center for Corporate Reputation, University of Oxford, 1111 E. 60th Street, Chicago, IL 60637, E-mail: lbernste@uchicago.edu. I would like to thank Douglas Baird, Oren Bar-Gill, Lucian Bebchuk, Brad Bernthal, Michal Barzuza, Patrick Barry, Edward Bernstein, Naomi Bernstein, Brian Bix, Philip Braun, Ron Burt, Avinash Dixit, Shai Dothan, Robin Effron, Daniel Elfenbein, Richard Epstein, Wendy Epstein, David Finkelstein, Roger Ford, Clay Gillette, Vic Goldberg, Adi Grinapell, Philip Hamburger, Oliver Hart, Avery Katz, Stella Katz, Louis Kaplow, Dan Kelly, Dan Klerman, Leandra Lederman, Adi Leibovitch, Jim Lindgren, Stewart Macaulay, Bentley MacLeod, Dotan Oliar, Omer Peled, Brad Peterson, Ariel Porat, Mark Ramseyer, Eric Rasmusen, Alan Schwartz, Bob Scott, Hanock Spitzer, Rafe Stolzenberg, Steve Tadelis, Hagay Volvovsky, Bill Whitford, Audrey Yang, Chris Yenkey, Robert Zafft, Eyal Zamir, David Zarfes, and participants at the Private Orderings Conference at the University of Oxford (2014), the Tel Aviv University Law and Economics Workshop, the Columbia Contracts Workshop, the Harvard Law and Economics Workshop, the Stanford Law and Economics Workshop, The Yale Private Law Meeting (2015), the American Law and Economics Association Annual Meeting (2015), the ISNIE Meetings (2015), The Boulder Flatirons Conference, The University of Colorado Workshop, The Kidwell Memorial Lecture at the University of Wisconsin-Madison and the University of Chicago Faculty Workshop for helpful comments and conversations. Special thanks are due to Josh Whitford who shared his interview data and insights as well as to Stella Katz, who introduced me to the world of procurement, and to Aviva Corre, William Schwesig, Weijia Rao, Connie Fleischer, Gilad Yaniv, Courtney Flowers, Kayla Gamin, and Margaret Schilt for their extraordinary research efforts. The Coase-Sandor Institute at the University of Chicago Law School provided funding for this work. The Author 2016. Published by Oxford University Press on behalf of The John M. Olin Center for Law, Economics and Business at Harvard Law School. This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial reuse, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact journals.permissions@oup.com. doi:10.1093/jla/law001 at Srials D eartm nt on N ovem er 1, 2016 http://jlardjournals.org/ D ow nladed from implications of these contract structures and the availability of network governance for firms’ make-or-buy decisions and the likelihood of innovation.