The Mediating Effect of Formal Contractual Controls in the Relationship Between Experience and Contract Design

摘要

An underlying assumption in the literature on inter-firm contracting has been that relational governance is better than formal controls at mitigating contractual hazards. If formal controls are at best inadequate and at worst useless, then it are hard to reconcile the practical observation that most firms continue to write detailed contracts that include a rich set of formal controls. Formal controls weaken under two conditions: first, conventional, accounting-based performance measures are not effective when uncertainty is high. Second, as parties accumulate contracting experience "specialized language develops" enabling less expensive options than formal ones. We therefore question the logic that formal controls can only be useful if they strengthen relational governance. In this paper, we posit that noisy performance measurement problem continues to exist in relational contracting as well as in formal contracting. And the purpose of such contractual controls therefore lies in mediating experience and contract design.