Executive Summary — Decades of research using a wide variety of detailed plant- and firm-level data has provided strong evidence of persistent performance differences among seemingly similar enterprises. But what causes these differences? In this paper, the chapter of a forthcoming book, Gibbons and Henderson focus on the role of "relational contracts" in sustaining persistent performance differences among seemingly similar enterprises. The paper provides evidence both that many important management practices rely on relational contracts, and that relational contracts can be hard to build and change. They explore a number of reasons that relational contracts may be difficult to build, exploring both "bad parameters" and "bad luck" and the difficulties inherent in communicating the full terms of an evolving contract. They suggest that this perspective opens up a rich field of research into the role that managers play in sustaining superior performance and explore a number of theoretical and empirical approaches that may prove fruitful in building further understanding. Key concepts include:
- Persistent performance differences among seemingly similar enterprises exist and are economically significant.
- Relational contracts are a key way that managers get organizations to get things done.
- Many competitively significant management practices rely on relational contracts that themselves are hard to build and change, leading to the slow diffusion of management practices that could improve organizational performance.
- Both Toyota and Southwest Airlines appear to have used investment in relational contracts as routes to enter industries that had for many years been dominated by firms with harder assets-superior brands and prime geographic locations.
- Relational contracts are an investment that might improve an enterprise's productivity. But investments are costly, and there are typically many such investments a firm could make.