Thursday, March 18, 2010

Informal contracts

John Kay summarises the difference between informal and explicit contacts echoing ideas about the need for flexibility in relationships that cover the question of where the firm should end and the nature of the legal background to firm formation: Coase and Williamson highlight some of these issues as informal and adaptive relationships may be more easily managed within the firm.

Lawyers for American companies spent hundreds of billable hours drawing up contracts to which no one ever referred. Their Japanese counterparts engaged in complex business relationships with no formal agreements at all, or ones that covered a single sheet of paper. But the commercial relationships that emerged in Japan’s car industry were more successful in securing component reliability and managing just-in-time inventory than those hammered out by the hard-nosed negotiators of Detroit.

La Porta, DeSilanes, Shliefer and Vishney "Legal Determinants of External Finance" seem to suggest that a more flexible legal system can also better deal with the heterogeneity of conflicts.

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