Beyond Relational Contracts: Social Capital and Network Governance in Procurement Contracts
AbstractThe master agreements that nominally govern the transactions between mid-western
OEMs and their suppliers are not, for the most part, designed to create legal obligations.
Rather, like the role played by firm boundaries in the Coase-Williamson theory of the firm,
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 implications of these contract structures and the availability of network governance for
firms’ make-or-buy decisions and the likelihood of innovation.