Relational Contracts in Strategic Alliances

Strategic alliances range from short-term cooperative projects, through long-term partnerships and joint ventures, to transactions that permanently restructure firm boundaries and asset ownership. The economics literature lacks a framework for analyzing this plethora of governance structures. In this paper, we draw on detailed discussions with practitioners to present a rich model of feasible governance structures. Our model focuses on three issues emphasized by practitioners: spillover effects (as opposed to specific investment or hold-up), contracting problems ex post (as opposed to only ex ante), and relational contracts (as opposed to spot transactions). Using this model, we first identify the managerial challenges presented by each governance structure and then analyze which governance structure is efficient in which environments. * We are very grateful for detailed discussions with several practitioners, especially Judy Lewent and Richard Kender of Merck, Inc. and Mark Edwards of Recombinant Capital, and also for research support from Harvard Business School (Baker and Gibbons), MIT’s Sloan School of Management (Gibbons), and USC’s Marshall School (Murphy). Relational Contracts in Strategic Alliances by George Baker, Robert Gibbons, and Kevin J. Murphy

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