Law, pride, and Contractual Relations

Alireza Naghavi, Giuseppe Pignataro and Katja Zajc Kejžar

Journal of Economic Behavior & Organization, 2025, vol. 235, issue C

Abstract: This paper provides theory and evidence on the role of informal institutions in contract enforcement, framed as the forfeiture of pride experienced by individualistic suppliers when they underperform or misappropriate others’ technology, and their interaction with law in shaping the behavior of firms. We demonstrate that achievement-oriented pride and self-esteem, more pronounced in individualistic societies, promote vertical integration in high-technology industries while encouraging outsourcing in low-technology sectors. Formal legal mechanisms mitigate the positive influence of pride on the longevity of business relationships, especially in high-technology sectors, where they act as a crucial substitute for deterring contract violations and infringement in less individualistic societies. For low-tech inputs, stricter law enforcement increases relationship duration up to a threshold level of individualism by compelling proud suppliers to invest despite receiving an insufficient payoff for their superior effort. This effect is more pronounced when their proportion is higher, suggesting a potential complementarity between law and pride in fostering longer-term relationships.

Keywords: Individualism; Supplier relation longevity; Legal institutions; Firm organization; Infringement; Contract enforcement; Pride (search for similar items in EconPapers)
JEL-codes: D23 F14 F23 K42 L24 O32 Z10 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:235:y:2025:i:c:s016726812500160x

DOI: 10.1016/j.jebo.2025.107041

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