Edited by Claude Ménard and Mary M. Shirley
Chapter 6: A mutually beneficial relationship: relational contracts in developing countries
Imperfect contract enforcement is a pervasive feature of real-life commercial transactions. Consequently, trading parties rely on long-term relationships based on trust, reputation, and the promise of future rents, to guarantee contractual performance. Developing countries offer fertile ground for studying such relational contracts (RCs) since the market failures and organizational responses are starker, there are fertile opportunities to test theory isolating confounding factors, and a deeper understanding can help design better policies. This chapter reviews recent contributions that highlight the empirical content of RC models, different empirical strategies to test for the presence and quantify the value of RCs in observational data, the interaction between informal RCs and formal governance structures and evidence of how RCs alter market functioning. The chapter highlights promising avenues for further research in this exciting area, not only between firms, but within firms and public bureaucracies, between state and other actors, in informal community organizations, and so on.
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