Learning to Contract: Evidence from the Personal Computer Industry

TLDR

Detailed contracts are increasingly common in markets, yet little analysis exists on how firms learn to use them to manage interfirm relationships over time. The study examines how two PC industry partners learn to contract over time, proposes that contracts can store governance knowledge and outlines boundary conditions, and offers directions for future research. The authors analyze a time series of 11 contracts between two PC industry partners from 1989 to 1997. The study shows that contract structures evolved incrementally due to firms learning to work together, suggesting that such learning is local and has implications for the debate on contracts’ effect on interorganizational trust.

Abstract

Organizational forms involving more detailed contracts than are found in traditional spot market exchanges appear to be increasingly prevalent. There has been relatively little analysis, however, of the extent to which firms learn how to use contracts to manage their interfirm relationships over time. In this paper, we conduct a detailed case study of a time series of 11 contracts concluded during 1989–1997 between the same two partners, both of whom participate in the personal computer industry, to explore whether and how firms learn to contract. We find many changes to the structure of the contracts that cannot be fully explained by changes in the assets at risk in the relationship, and evidence that these changes are largely the result of processes in which the firms were learning how to work together, including learning how to contract with each other. The nature of this learning appears to have been quite incremental and local, that is, not very far sighted. We suggest how and when contracts might serve as repositories for knowledge about how to govern collaborations, and suggest some boundary conditions for this phenomenon. Our findings also provide implications for the debate about whether contracts have a positive or negative effect on interorganizational trust. We conclude with suggestions for future research.