Relational Contracts and Optimal Quantity Flexibility

Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 629)


So far in this treatise, we have seen that relational contracts persist in practice. A reason for this is that unobservable or uncontractible performance is hard to capture in formal contracts. In this case, relational contracts may provide an effective remedy.More precisely, in long-term business relationships, these contracts help to overcome the problem of incentivizing performance by introducing informal agreements. We have also learned that formal court-enforceable contracts are the only enforceable contracts when the relation between the contracting parties is finite. But in the case of a repeated, open-ended relationship, the situation changes. Now, any formal court-enforceable contract may be extended with informal self-enforced agreements, and hence become a relational contract. That is exactly what we will do in this chapter: A supplier and a buyer contract on the basis of a formal quantity flexibility (QF) contract. With the goal of preserving and improving quality, they engage in a long-term business relationship, thereby making room for informal agreements on the actual utilization of quantity flexibility. We will see that an optimal relational contract exists. Moreover, a simple stationary contract design can be determined giving guidance to the supply chain partners to organize their business relationship in an optimal way.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.WHU-Otto Beisheim School of ManagementVallendarGermany

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