Contracting in Networks: What is New and Why It Matters

Abstract: In the opening address to the Annual Conference of International Society of New Institutional Economics in Washington, DC in 1999, the Ronald Coase observed that economists fail to answer one fundamental question: “what determines what goods and services are traded on markets and therefore priced? What determines the flow of real goods and services and therefore the standard of living?” (Coase, 1999). These questions are relevant because goods and services that are necessary for individual actors need to solve their problems are not available in a single, concentrated form; and they are certainly not available only within an isolated dyad between a buyer and seller itself. Instead, the goods and services that an actor needs are widely dispersed among many actors within networks of business relationships. A particular deal that actors would need is not a fixed entity but rather the outcome of long and time-consuming interactions that affect further interactions. I consider the questions of what determines the trade and thus the flow of goods and services by taking a network perspective on contracting. By taking a network perspective, I elaborate on three forces: 1) infinite connectivity, 2) constitutional pluralism and 3) ongoing consent and illustrate the applicability of these forces through real-life cases in the context of business-to-business networks.