Contract Law, Trust Relations, and Incentives for Co-operation: A Comparative Study

Abstract

Abstract There is, it seems, a wide consensus to the effect that the institutions of contract law are largely marginal to the processes of business contracting. Following Macaulay (1963), most socio-legal scholars would maintain that business parties make little use of contract as a planning or incentive mechanism in long-term business relationships, and that they value flexibility more highly than strict adherence to contract terms. Transaction cost economics has echoed this theme, suggesting that in the case of ‘bilateral governance’, specialized governance structures can operate to maintain the relationship without the need for external legal support (Williamson 1985). In this chapter we report evidence which casts doubt on both these contentions, and which, we would suggest, requires a reassessment of the role of contract law in shaping contractual co-operation. The evidence is derived from a comparative survey of inter-firm relations in Britain, Germany, and Italy. Both inter-firm contracts, in the sense of formal agreements, and the wider system of contract law are found to have an important role to play in fostering trust, in the sense of ‘a mechanism by which actors reduce the internal complexity of their interaction system and which enables the actors to mutually establish specific expectations about their future behaviour’ (Lane and Bachmann 1996: 367). The influence of the legal system needs to be understood in the context of other institutional factors, in particular the activities of industry-level trade associations and of standard-setting organizations.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 65 citations exist upstream.