Relational Contract TheoryEmpiricalexpeditions on the nature of the contracts is not a new thing. Some importantstudies and various scholars have observed and come out with distinctive roots ofempirical explorations on contracting relating to Steward Macaulay’s seminalwork in 1963 (Eigen, 2012).
Thetheory “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 ofcontracting, he avoids treating any governance models of exchanges, where mostof his work is related to the social environment and behavioral norms. On the other hand, Macaulay defined it simplyoccur based on the trust between parties (1963). It may be said that empirics are on their way ofperceiving the importance of this concept, which has had significantly longerpersuasion scholarship in law and social sciences (Eigen, 2012).Thistheory was created as a result of the arguments which was brought by some 90’sscholars criticizing the view of the theories consent belongs at the heart oftraditional and classical contract laws (Barnett,1992; Campbell,2004; Williamson,2007). Famously Charles Fried (1981), Grant Gilmore (1974), & Ian MacNeil (1985) theorizedon those contracts and pointed out that the shortcoming born due to theinconsistency between, how a contract assumed to be experienced by the law andhow it actually be experienced. Perhaps it was the earlier work by StewardMacaulay (1963) then Ian MacNeil (1980) thatevaluated the periphery under which parties expected to engage in contractsbetween businesses that barely paved the way for these theoretical reconciliations(Eigen, 2012).
Over time, contract law might not have evolved very much away fromeconomic and business studies. The term “contract” as a concept has beendeveloped historically with an ancient mean of managing and regulating dyadicexchanges (Eigen, 2012).Contracts are manifestations of legally enforceableagreements that can be found in all kind of business alliances, strategicpartnerships or collaborations and it creates an intention to be legallybounded to fulfill a commitment. (Heide andJohn, 1990; Roxenhall and Ghauri, 2004; Baker, Gibbons and Murphy, 2008).(Barnett,1992; Mouzas& Blois,2008). To have a better understanding on the complexity ofdisciplinary approaches and questions framed on contracts raised in modernempirical explorations many scholars, courts and legislators in various fieldshave bring out a more simplified definition on contracts, as the product ofbilaterally exchanged commitments freely negotiated and agreed upon by theparties (Macaulay 1963; McIntyre 1994).The nature, attributes and forms of contracts has beeninvestigated by scholars using various approaches under different disciplinesand emphasis, (Argyres & Mayer,2007; Blois,2002; Harrison, 2004; Schwartz & Scott, 2003) andhave provided a view through different angles which to study exchangerelationships.
Within a corporate world of exchange relationships, whichcentralizing to some dominant research works (e.g. Lambe, Spekman & Hunt,2000; MacNeil,1980;1985; Macaulay,1963; Williamson,1981;2007), understanding theforms and nature of the contractual management is an important issue. Suchunderstanding allows individuals to examine how contractual decisions are beenachieved and expressed under different modes of governance that functionbetween interrelated companies in business network (Mouzas & Blois, 2008).The experience of independent contracting has been, anticipatedand the comparative reconfiguration from long term contracting to commonownership is compatible with the basic transaction cost minimizing argument byWilliamson (1981). According to him contracts basically fall into two distinctcategories, legal and relational contracts.
Even though exchange parties arelegally bounded on a particular transaction, it will generate a mode ofrelational governance in the long term. The common view on legal rules providemore elastic concept of contract as framework, where the framework neverprecisely 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 anotherpossible remedy when contracts are imperfect: leave the governance structurealone, but move to “relational contracting” (Gibbons,2005, p.236).A relational contract is a relational or a self-enforcingagreement so rooted within parties in particular circumstances while itcontains some elements which cannot be enforced by a third party, such as courtand contains absolute elements where third parties are unable to verify whethercontractual obligations have been met (Gibbons,2005; Mouzas & Blois,2008).Indeed.
relational contracts are frequently based upon unwritten codes andconducts of informal agreements, for economists it can be create indefinitesituations that makes a doubt on relational elements which referred to theinterpretation and the establishment of contracts (Mouzas & Blois, 2008).So on one hand benefits of the relational contract is that theyallow “the parties to utilize their detailed knowledge of their specificsituation 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 beenforced by a third party (Mouzas & Blois, 2008).Moreover relationalcontracts within and between firms help to evade difficulties in formalcontracting mainly difficulties occur due to the enforcement of a third partysuch as court (Baker, Gibbons, & Murphy, 2002) and by maintaining along term orientation and long term relational contracts ,it helps firms toperform well achieving mutual gains in voluntary exchanges (Buchanan, 2001) while mitigating hold up problemsbetween parties (Kukharskyy & Pflüger, 2010).Much of the work related to ‘relationalcontracts’ was based on the studies of Ian Macneil where he claims there is aseparate ‘relational’ category of contracts (Campbell,2004).
What he refers toas “relational” form of contracting, involves arbitration, collectivebargaining and other types of contractual market exchanges that are becomingmore important and need to be recognized (Williamson, 1981). Macneilpresents nothing less than a “holistic” “social theory” ofhuman exchange-with particular emphasis on thehuman activity of “projecting exchangeinto the future,” which he calls “contract.”.
He develops anelaborate descriptive set of “norms” that should be undertaken, to ifcontractual exchange to be exist and success. Most importantly, however, the conventiontheory of contract is an unabashed relational theory of contract(Barnet,1992). According to Barnett’s (1992) original presentation of a consenttheory: “Any concept of individual rights must assume a social context”and he proposed that certain rights are important, to enable the existence of arelational order of actions that allow persons to solve the various problems ofknowledge and interest. And accorded with the second feature of Macneil’stheory that merits investigation is his consistent assertion that standingbehind all relational exchange or contracts is a socially enforced system ofproperty (Barnet,1992). In relational exchange, the relationship is acritical governance mechanism and, a key determinant that lead a relationalexchange to the success. Simply where relational contracts are highlyeffective, requires a relationship that has high levels of such relationalattributes as trust and commitment that help govern the exchange (Anderson and Narus 1984, 1990; Day 1995; Dwyer, Schurr, andOh 1987; Heide and John 1992; Morgan and Hunt 1994; Wilson 1995), whereall those attributes are a created, developed and exhumed through a social contextor based on the social capital theory. Social Capital TheorySocial Capital Theory has drawn much academicinterest and research, has been stated as both concept as well a theory in pasttwo decades (Lin, Cook, & Burt, 2001).
The theory of social capital has been usedto explore the role, nature and the importance of connections, networks andforms of community (Cronin, 2016). The attraction of the concept is perhaps inpart due to the common understanding that as social element, it may capture thespirit of many sociological concepts such as social support, socialintegration, social cohesion, and even norms and values (Lin, Cook, & Burt, 2001). SCT serves as an umbrella term thatcan be easily understood and it has been developed by scholars from a range ofdisciplines (Lin, Cook, & Burt, 2001) although supported asa 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 PierreBourdieu (Cronin, 2016).
Someacademicians have examined the use of the word ‘capital’ to identify theessence of social exchanges and attitudes. has Certainly, social capital reveals a number of features thatdistinguish it from other forms of capital. Unlike physical capital, butlike 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 extentthat social interaction is drawn on to produce jointly beneficial output, thequantity or quality of these relations expected to be increase.
Chow & Chan(2008) has explained that social capital exists and create in the relationshipsamong people and it describe variety of pro-social behaviours, like sharedactions and community involvement whereas Coleman (1988) claimed that it helpsin stimulating actions between persons, parties or corporations where inoverall is has emerged with a relational perspective that terms social andrelational vary hand in hand and they are highly related each other (MacNeil,1985;Putnam,2005). For example, relational qualities such as trust and commitmentdeveloped with each other over a history of interactions, provides a foundationfor shared actions where these concepts and attributes come from the long termnetwork relationship held by different entities, which includes formal andinformal collaborative relationships, and the social networks formed byunderstanding between people (Hung, Lin, & Chen, 2013). Social capital is a social science concept that used in business, politicalscience, economics, public health, sociology and organizational behavior, also itrefers to the network of relationships controlled by an individual or a society,that set of resources embedded within it, strongly influence the extent towhich interpersonal knowledge sharing would occur (Darvish & Nikbakhsh,2010;Nahapiet & Ghosal,1998).
Although there are diversified set of relateddefinitions 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 canbe obsessed by a large number of people, social capital is unique. It exists inthe structure of relationships between or among actors, making it a resourcethat 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 existingpersonal relations and networks of relations that embedded in severalrelationships forming trust and establishing expectations. In recent years, anumber of scholars have followed in applying this concept to different socialphenomena, such as internal and external organizational relationships, andcommunity relationships, as a result social capital is commonly used to studybuyer-seller relationships and economic actions (Hung, Lin & Chen,2013; Lu,Feng, Trienekens & Omta,2012).
Researchers have argued that social capital is a multidimensionalconcept (Garrison, 2009). Nahapiet and Ghoshal (1998), in theircomprehensive review of the conceptual literatureon social capital, categorized the construct of social capital into three distinctbut clearly interconnected dimensions: structural, cognitive and relational. Individual dimensions are assumed to provide unique resourceaccess, such as information through limited associates or trust and reciprocitythat enhance the dynamic competency of using such information and they are veryimportant centered to their own features (Garrison, 2009). Structural Capital: Structural social capital involves social and network relations supplementingrules, procedures, precedents and enables information sharing, mutual actionsand decision making through established roles. For itself, it is a relativelyobjective and externally observable concept (Chow & Chan,2008; Garrison,2009).This, principally studied using a network approach where it refers to the waysin which inspire recipients gain access to actors with desired sets of knowledgeor intellectual capital. Famously, network pattern, hierarchy, density andconnectivity 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 thesocial system and the network of relations as a whole. The term defines theimpersonal formation of links between people or entities. They used the conceptof the structural dimension of social capital to denote the overall pattern ofconnections between actors denoting that existence of networks created for onepurpose can be used for another. Relational Capital: In contrast to structural embeddedness, the term relational embeddednessdefines the kind of personal relationships that people have developed with eachother 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 possibleopportunity exploitation potentials among parties (Garrison, 2009).
Simply, accordingto Caraliu & Nijkamp (2011) relational capital is the economic value ofstable, long-run business networks. This definition involves with a setof economic characteristics, in terms of reduced transaction, informationprocurement and contract implementation costs, associated with the existence oflocal networks of long-run and stable business relations. Cognitive Capital: