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Relational Contract Theory

Empirical
expeditions on the nature of the contracts is not a new thing. Some important
studies and various scholars have observed and come out with distinctive roots of
empirical explorations on contracting relating to Steward Macaulay’s seminal
work in 1963 (Eigen, 2012).The
theory “Relational contract” was originally developed by scholars, Ian Roderick MacNeil (1980) and Steward Macaulay (1963) in United States. According to MacNeil
(1985), he mainly focuses on exchange relationships as a behavioral aspect of
contracting, he avoids treating any governance models of exchanges, where most
of his work is related to the social environment and behavioral norms. On the other hand, Macaulay defined it simply
occur based on the trust between parties (1963). It may be said that empirics are on their way of
perceiving the importance of this concept, which has had significantly longer
persuasion scholarship in law and social sciences (Eigen, 2012).

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This
theory was created as a result of the arguments which was brought by some 90’s
scholars criticizing the view of the theories consent belongs at the heart of
traditional and classical contract laws (Barnett,1992; Campbell,2004; Williamson,2007). Famously Charles Fried (1981), Grant Gilmore (1974), & Ian MacNeil (1985) theorized
on those contracts and pointed out that the shortcoming born due to the
inconsistency between, how a contract assumed to be experienced by the law and
how it actually be experienced. Perhaps it was the earlier work by Steward
Macaulay (1963) then Ian MacNeil (1980) that
evaluated the periphery under which parties expected to engage in contracts
between businesses that barely paved the way for these theoretical reconciliations
(Eigen, 2012).

Over time, contract law might not have evolved very much away from
economic and business studies. The term “contract” as a concept has been
developed historically with an ancient mean of managing and regulating dyadic
exchanges (Eigen, 2012).Contracts are manifestations of legally enforceable
agreements that can be found in all kind of business alliances, strategic
partnerships or collaborations and it creates an intention to be legally
bounded to fulfill a commitment. (Heide and
John, 1990; Roxenhall and Ghauri, 2004; Baker, Gibbons and Murphy, 2008).
(Barnett,1992; Mouzas
& Blois,2008). To have a better understanding on the complexity of
disciplinary approaches and questions framed on contracts raised in modern
empirical explorations many scholars, courts and legislators in various fields
have bring out a more simplified definition on contracts, as the product of
bilaterally exchanged commitments freely negotiated and agreed upon by the
parties (Macaulay 1963; McIntyre 1994).

The nature, attributes and forms of contracts has been
investigated by scholars using various approaches under different disciplines
and emphasis, (Argyres & Mayer,2007; Blois,
2002; Harrison, 2004; Schwartz & Scott, 2003) and
have provided a view through different angles which to study exchange
relationships. Within a corporate world of exchange relationships, which
centralizing to some dominant research works (e.g. Lambe, Spekman & Hunt,
2000; MacNeil,1980;1985; Macaulay,1963; Williamson,1981;2007), understanding the
forms and nature of the contractual management is an important issue. Such
understanding allows individuals to examine how contractual decisions are been
achieved and expressed under different modes of governance that function
between interrelated companies in business network (Mouzas & Blois, 2008).

The experience of independent contracting has been, anticipated
and the comparative reconfiguration from long term contracting to common
ownership is compatible with the basic transaction cost minimizing argument by
Williamson (1981). According to him contracts basically fall into two distinct
categories, legal and relational contracts. Even though exchange parties are
legally bounded on a particular transaction, it will generate a mode of
relational governance in the long term. The common view on legal rules provide
more elastic concept of contract as framework, where the framework never
precisely denotes an exact outlook of the relational influences on exchanges,
but afford a rough idea around which such relations can be vary (Williamson, 2007). However, some economists proposed that “there is another
possible remedy when contracts are imperfect: leave the governance structure
alone, but move to “relational contracting” (Gibbons,2005, p.236).

A relational contract is a relational or a self-enforcing
agreement so rooted within parties in particular circumstances while it
contains some elements which cannot be enforced by a third party, such as court
and contains absolute elements where third parties are unable to verify whether
contractual obligations have been met (Gibbons,2005; Mouzas & Blois,2008).
Indeed. relational contracts are frequently based upon unwritten codes and
conducts of informal agreements, for economists it can be create indefinite
situations that makes a doubt on relational elements which referred to the
interpretation and the establishment of contracts (Mouzas & Blois, 2008).So on one hand benefits of the relational contract is that they
allow “the parties to utilize their detailed knowledge of their specific
situation and to adapt to new information as it becomes available” (Gibbons,
2005, p.236) but, on the other hand for the very same reasons, they cannot be
enforced by a third party (Mouzas & Blois, 2008).Moreover relational
contracts within and between firms help to evade difficulties in formal
contracting mainly difficulties occur due to the enforcement of a third party
such as court (Baker, Gibbons, & Murphy, 2002) and by maintaining a
long term orientation and long term relational contracts ,it helps firms to
perform well achieving mutual gains in voluntary exchanges (Buchanan, 2001) while mitigating hold up problems
between parties (Kukharskyy & Pflüger, 2010).

Much of the work related to ‘relational
contracts’ was based on the studies of Ian Macneil where he claims there is a
separate ‘relational’ category of contracts (Campbell,2004). What he refers to
as “relational” form of contracting, involves arbitration, collective
bargaining and other types of contractual market exchanges that are becoming
more important and need to be recognized (Williamson, 1981). Macneil
presents nothing less than a “holistic” “social theory” of
human exchange-with particular emphasis on the
human activity of “projecting exchange
into the future,” which he calls “contract.”. He develops an
elaborate descriptive set of “norms” that should be undertaken, to if
contractual exchange to be exist and success. Most importantly, however, the convention
theory of contract is an unabashed relational theory of contract
(Barnet,1992). According to Barnett’s (1992) original presentation of a consent
theory: “Any concept of individual rights must assume a social context”
and he proposed that certain rights are important, to enable the existence of a
relational order of actions that allow persons to solve the various problems of
knowledge and interest. And accorded with the second feature of Macneil’s
theory that merits investigation is his consistent assertion that standing
behind all relational exchange or contracts is a socially enforced system of
property (Barnet,1992). In relational exchange, the relationship is a
critical governance mechanism and, a key determinant that lead a relational
exchange to the success. Simply where relational contracts are highly
effective, requires a relationship that has high levels of such relational
attributes as trust and commitment that help govern the exchange (Anderson and Narus 1984, 1990; Day 1995; Dwyer, Schurr, and
Oh 1987; Heide and John 1992; Morgan and Hunt 1994; Wilson 1995), where
all those attributes are a created, developed and exhumed through a social context
or based on the social capital theory.

 

 

Social Capital Theory

Social Capital Theory has drawn much academic
interest and research, has been stated as both concept as well a theory in past
two decades (Lin, Cook, & Burt, 2001). The theory of social capital has been used
to explore the role, nature and the importance of connections, networks and
forms of community (Cronin, 2016). The attraction of the concept is perhaps in
part due to the common understanding that as social element, it may capture the
spirit of many sociological concepts such as social support, social
integration, social cohesion, and even norms and values (Lin, Cook, & Burt, 2001). SCT serves as an umbrella term that
can be easily understood and it has been developed by scholars from a range of
disciplines (Lin, Cook, & Burt, 2001) although supported as
a way to explore and resolve a wide variety of social issues and problems,
including: health and well-being, crime, education and economic growth.

The theorization of social capital, however,
is mainly related to three writers, James Coleman, Robert Putnam and Pierre
Bourdieu (Cronin, 2016).Some
academicians have examined the use of the word ‘capital’ to identify the
essence of social exchanges and attitudes. 
has Certainly, social capital reveals a number of features that
distinguish it from other forms of capital. Unlike physical capital, but
like human capital, social capital has described as a result of its use (Garrison, 2009). According to him,
social capital is both an input and an output of mutual actions, to the extent
that social interaction is drawn on to produce jointly beneficial output, the
quantity or quality of these relations expected to be increase. Chow & Chan
(2008) has explained that social capital exists and create in the relationships
among people and it describe variety of pro-social behaviours, like shared
actions and community involvement whereas Coleman (1988) claimed that it helps
in stimulating actions between persons, parties or corporations where in
overall is has emerged with a relational perspective that terms social and
relational vary hand in hand and they are highly related each other (MacNeil,1985;
Putnam,2005). For example, relational qualities such as trust and commitment
developed with each other over a history of interactions, provides a foundation
for shared actions where these concepts and attributes come from the long term
network relationship held by different entities, which includes formal and
informal collaborative relationships, and the social networks formed by
understanding between people (Hung, Lin,
& Chen, 2013).

 

Social capital is a social science concept that used in business, political
science, economics, public health, sociology and organizational behavior, also it
refers to the network of relationships controlled by an individual or a society,
that set of resources embedded within it, strongly influence the extent to
which interpersonal knowledge sharing would occur (Darvish & Nikbakhsh,2010;
Nahapiet & Ghosal,1998). Although there are diversified set of related
definitions to the social capital theory, all of them tend to share the core idea
‘that social networks have value’. Unlike financial or human capital, which can
be obsessed by a large number of people, social capital is unique. It exists in
the structure of relationships between or among actors, making it a resource
that doesn’t lie with one individual, but instead is mutually owned (Coleman, 1988;
Edelman, Bresnen, Newell, Scarbrought & Swan,2000).This theory identi?es the importance of existing
personal relations and networks of relations that embedded in several
relationships forming trust and establishing expectations. In recent years, a
number of scholars have followed in applying this concept to different social
phenomena, such as internal and external organizational relationships, and
community relationships, as a result social capital is commonly used to study
buyer-seller relationships and economic actions (Hung, Lin & Chen,2013; Lu,
Feng, Trienekens & Omta,2012).

Researchers have argued that social capital is a multidimensional
concept (Garrison, 2009). Nahapiet and Ghoshal (1998), in their
comprehensive review of the conceptual

literature
on social capital, categorized the construct of social capital into three distinct
but clearly interconnected dimensions: structural, cognitive and relational. Individual dimensions are assumed to provide unique resource
access, such as information through limited associates or trust and reciprocity
that enhance the dynamic competency of using such information and they are very
important centered to their own features (Garrison, 2009).

 

Structural Capital: Structural social capital involves social and network relations supplementing
rules, procedures, precedents and enables information sharing, mutual actions
and decision making through established roles. For itself, it is a relatively
objective and externally observable concept (Chow & Chan,2008; Garrison,2009).
This, principally studied using a network approach where it refers to the ways
in which inspire recipients gain access to actors with desired sets of knowledge
or intellectual capital. Famously, network pattern, hierarchy, density and
connectivity are the factors that are usually measured by this dimension (Edelman,
Bresnen, Newell, Scarbrough & Swan,2000). According to Nahapiet & Ghoshal (1998) Structural embeddedness concerns the properties of the
social system and the network of relations as a whole. The term defines the
impersonal formation of links between people or entities. They used the concept
of the structural dimension of social capital to denote the overall pattern of
connections between actors denoting that existence of networks created for one
purpose can be used for another.

 

Relational Capital: In contrast to structural embeddedness, the term relational embeddedness
defines the kind of personal relationships that people have developed with each
other through a history of interactions. Where the theory of relational capital entails personal relationships built on a long term trust,
norms, respect, friendliness, responsibilities and identi?cation that raise awareness of actors toward their mutual goals (Carvish & Nikbakhsh,2010;Chow & Chan, 2008)
whereas it’s possible that such aspect will facilitate tacit knowledge sharing, thus assist a greater range of possible
opportunity exploitation potentials among parties (Garrison, 2009). Simply, according
to Caraliu & Nijkamp (2011) relational capital is the economic value of
stable, long-run business networks. This definition involves with a set
of economic characteristics, in terms of reduced transaction, information
procurement and contract implementation costs, associated with the existence of
local networks of long-run and stable business relations.

 

Cognitive Capital:

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