Relational contracting Sample Clauses

Relational contracting. In countries lacking workable laws of contract, relational contracting is used in place of the law. Even in countries with sophisticated legal systems, however, relational contracting is needed, for the law does not work frictionlessly. The transaction costs of appealing to the law sometimes exceed the transaction costs of using relational contracting. Market participants have some advantages over judges in deciding whether commitments have been lived up to, as identified by Xxxxxx (1990). First, market participants are more expert than courts in monitoring other participants' conduct. Second, their decisions can be more nuanced than the binary decision of liability or no liability that the court must make. Third, they can consider information that cannot be introduced in court, such as impressionistic evidence about business trends or judgments about the quality of items sold. They can base their decisions on a firm's behavior over time, on probabilistic patterns that would not be admissible evidence in court. For these reasons, as Macaulay (1963) showed, courts are seldom used to resolve disputes between trading partners even in the United States, and using them generally marks the termination of the trading relationship.7 Firms generally rely on relational contracting. We test four sets of predictions about when contracting can be supported by informal punishments.8 First, the most straightforward punishment is refusing to deal with the trading partner in the future. The threat of severing a relationship gains force if it is costly to find alternative trading partners (Xxxxxxx, 1996; Xxxxx and Xxxxxx, 1996). Firms work to sustain relationships to avoid searching for new trading partners. The first hypothesis to be tested, therefore, is that customers with higher search costs receive more trade credit. We proxy the customer’s cost of finding a new supplier, i.e., an alternative to the interviewed firm, by the number of competitors 7In our data, too, we find that the use of courts generally signals the severing of a relationship with a trading partner. In Poland, for example, the relationship was severed in 98% of the cases where courts were used to resolve a dispute, compared to 78% of the cases where they were not used in a dispute. 8 Xxxxxx and Xxxxxx (1998), for Bulgaria, and Xxxxxxx, Xxxxxxx, and Xxxxxxxx (1999), for Russia, also find relational contracting to be the main form of contracting. In developing countries, as well as transition countries, ...