Relationship Building
Abstract: The question of how to develop a relationship is central to business and management. This is especially true when the environment is characterized by informational asymmetries and subjectivity, as for example in management consulting. This paper presents a model of relationship building inspired by features of the consultant-client relationship. I develop a model in which the consultant may have private information about the difficulty of the client's problem, and the client has private information about his decision to exert costly, difficulty-reducing effort. Consistent with the evidence, I show that consultants and clients optimally start with low-risk, low-return assignments, and move up to high-risk, high-return assignments over time as they accumulate relationship capital. The probability of conflict and breakup of the relationship due to differences of opinion about the magnitude of the client's problem is decreasing over the course of the relationship, but may jump when the parties switch to a higher-risk assignment. Implications for other relationships are briefly discussed.
