Contractual Learning and The Development of Heterogeneous Contracting Capabilities

Previous research suggests that parties in contractual relationships adopt a governance structure that economizes on transaction costs, and then over time learn to govern the contractual relationships in a more efficient manner by incrementally aligning contractual terms with transaction attributes based on new experiences made in the relationship. This implies that learning to contract and the development of contracting capabilities are largely experiential and directly related to the parties’ amount of contractual experience. We argue that this model is likely to underestimate the level of heterogeneity in contracting capabilities across firms. Hence, we add to the learning to contract literature by suggesting a series of firm- and industry level moderators of the relationship between contractual experience and the development of contracting capabilities. We specifically highlight the role of organizational specialization and integration as factors likely to increase heterogeneity across firms. Because firms with heterogeneous contracting capabilities are subject to differential incentives, a counterintuitive implication of the argument is that strong contractual learning dynamics may in fact lead to reduced incentive alignment and intensified contractual hazards