Regulative, Normative and Cognitive Institutional Supports for Relational Contracting in Infrastructure Projects

Witold Henisz (The Wharton School)
Raymond Levitt (Stanford University)

Abstract: We integrate, extend and apply economic, legal, sociological and psychological governance perspectives on relational contracts in the face of the heretofore neglected contractual hazard of ―displaced agency‖ (i.e., the costs that accrue to a series of interdependent transactions as a result of counterparties‘ incentives to pass through or shift costs or responsibilities to a counterparty not represented in the current transaction to the long-term detriment of the current residual claimant). We draw upon evidence from interdependent transactions in large, cross-sectoral, multi-phased civil infrastructure projects—including one-off transactions with no strong ―shadow of the future,‖ but where elements of relational contracting are still ubiquitous. We use this evidence to demonstrate the presence of strategies designed to enhance the efficacy of relational contracts that draw not only on regulative supports (e.g., laws, regulations, contracts and their enforcement through litigation, arbitration of incentive compatible self-regulation) but also normative (e.g., socially shared expectations of appropriate behavior, and social exchange processes) and cognitive (e.g., creating shared identities, scripts or conceptual frameworks to bridge differences in values or interests) supports. Finally, we propose transaction-, counterparty-, relationship-, field- and country-level characteristics that alter the incidence and efficacy of these regulative, normative and cognitive supports for relational contracting.

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