Relational contracts and development

Rocco Macchiavello

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article reviews an emerging body of evidence on relational contracts, defined as informal arrangements sustained by the value of future interactions. We focus on developing and international markets, which are often characterized as contexts with weak formal contract enforcement. We introduce relational contracting between firms as a governance form alternative to both firms and markets. We then review evidence on the prevalence of long-term relationships between firms and discuss why this governance form might be particularly common in developing countries. After introducing a simple framework, we discuss the measurement of relational contracting between firms. We review an approach that takes dynamic incentive compatibility constraints to the data to quantify the value of future interactions and illustrate how different types of shocks can be used to uncover the inner functioning of relational contracting. We also review structural models and conclude with policy implications and promising avenues for future research.

Keywords: governance forms; relational contracts; trust; organizational economics; development economics (search for similar items in EconPapers)
JEL-codes: L10 L14 L22 L23 O12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-08-01
New Economics Papers: this item is included in nep-reg
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Citations: View citations in EconPapers (2)

Published in Annual Review of Economics, 1, August, 2022, 14, pp. 337 - 362. ISSN: 1941-1383

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Journal Article: Relational Contracts and Development (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:116662

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