(Wednesday, 25th May 2022)
Title : Managing Relational Contracts
Relational contracts are informal agreements based on trust. They take place in ongoing relationships such as employment or B2B relations. Their main advantage is that they do not need the courts to be enforced. Instead, the parties honor the agreement because they want to keep the relationship alive in the future. This feature makes them particularly valuable in countries with weak institutions. In this workshop, we will explain how these relationships work and summarize the main take-aways of the literature. We will then focus on how firms should manage these relationships with third parties such as other firms and governments. Suppose a manager is in charge of maintaining a relationship with a supplier on behalf of the firm. What happens if this manager accepts kickbacks from the supplier? Kickbacks are also based on trust, is this unambiguously detrimental for the firm? Can firms build such informal relationships with governments as well? Can they be a way to avoid expropriations in countries where the rule of law is weak?