Building Relational-contracting Capability
John M. de Figueiredo (Duke University)
Brian S. Silverman (University of Toronto)

Abstract : How do firms build relational contracting capability? Although there is a burgeoning literature on the benefits of relational contracts, most studies focus on the maintenance and performance of existing relational contracts. Yet there is growing recognition that development of relational contracting capability – that is, the ability to establish relational contracts that are both clear and credible – is difficult. In this qualitative study, we examine the first interfirm relationship established by Hewlett-Packard – its partnership with Canon to co-develop and commercialize the desktop laser printer. Based on interviews with participants in the HP-Canon relationship going back to the early 1980s, coupled with archival information, we document the steps taken to assess the conditions for a fruitful relationship, establish the parameters of a relational contract to support that relationship, and address unexpected events that put strain on the relational contract. These actions are informed by relational contracting theory, and also shed light on the agency problems that can exist in relational contracts when the incentives of managers in the alliance differ from the incentives of executives in the alliance.

Firm Organization in the Digital Age: It Use and Vertical Transactions in U.s. Manufacturing
Chris Forman (Cornell University)
Kristina McElheran (University of Toronto )

Abstract : We investigate whether manufacturing plants change the degree to which they outsource downstream value-chain activities in the wake of advances in information technology (IT). Using U.S. Census Bureau data for over 5,500 establishments over ten years, we observe whether production is destined for further transformation within the same firm or is sold to external value chain partners. We also directly observe how plants are using general-purpose IT for different types of coordination. Exploiting the technology shock of the commercial internet in the mid-1990s, we compare pre-internet transaction patterns to post-internet ones at a given plant as a function of changes in IT use. Controlling for time-varying plant and firm characteristics – including changes in the ownership of establishments throughout the firm - our results show that externally-focused coordination over the internet was associated with a significant increase in market-based exchange. Moreover, this comes at the expense of internal vertical transfers and is consistent with a causal relationship between IT use and firm re-organization over time. To the extent that firm boundaries depend on the volume and locus of economic activity – and not just the number of units a firm owns – this has profound implications for the organization and size of firms in the digital age.

Effort and Compensation in Relational Contracts
Desmond Lo (Santa Clara University)
Heikki Rantakari (University of Rochester)

Abstract : To generate downstream sales, manufacturers often spend both effort and compensation when working with their dealers. Existing theories are inconclusive about the interdependent role of the two kinds of instruments in motivating dealer effort; that is, whether they are substitutes or complements. There is little empirical evidence to inform their relations either. We first examine the conditions that determine the interdependencies among monetary compensation – both formal and informal – and manufacturer effort in a game-theoretical framework. We show that monetary compensation and manufacturer effort are complementary instruments in motivating dealer effort if the manufacturer’s effort is primarily about monitoring. They become substitutes when the manufacturer’s effort is primarily productive and thus provides indirect compensation. We then empirically illustrate some of these novel predictions in the distribution channel of the leading manufacturer of a computer accessory and its sixty dealerships in China. In particular, evidence from company archival and survey data shows complementarity between informal compensation and manufacturer effort in motivating dealer effort. This result appears to hold only when the dealers are situated in highly relational contexts. Theoretical and managerial implications are drawn from our analyses.