Networks, Relational Contracts and the Theory of the Firm: Beyond Williamson 1 Networks, Relational Contracts and the Theory of the Firm: Beyond Williamson

This paper analyses the role of relational contracts in the formation of networks and the conditions that make these contracts feasible. Relational contracts help circumvent difficulties in formal contracting and allow parties to utilize their detailed knowledge of their situation while adapting to new information as it becomes available (MacNeil, 1978). However, these contracts cannot be enforced by a third party and must be self-enforcing, which means that the value of the future relationship must be sufficiently large so that neither party wishes to renege (Dixit, 2004). However, what causes certain contracts to breakdown while others go well? According to Baker et al (2002) integration affects the parties ’ temptation to renege a relational contract. Thus, in a given environment, a desirable relational contract might be feasible under integration but not under non-integration- and this will be particularly true when we face alternative asset prices that vary too much. Empirical research was conducted to assess the determinants of companies’ decisions between contracting law services in the market and employing an internal legal department. That could be explained by the variation on assets value (in the case, the value of legal services), the total amount of the pay-offs and the institutional environment