Relational Contracts And Structure Of Property Rights

Relational contracts and property rights have been two main topics in the field of firm theory. But these two fields have been always discussed independently, developing into two totally different branches. The first one, property rights theory, mainly focuses on the optimal property structure, by comparing the total surplus with or without integration; while the other, relational contract theory, emphasizes how the total welfare can be improved by a self-enforced implicit contract without outside monitoring. This paper tries to combine these two approaches into a unified framework. Based on property rights theory, we use the technique of repeated game to analyze under different legal environments, the establishment and implementation of the relational contracts, the relative performance between different combinations of contracts and dynamic evolution of optimal property structure.At first we focus on a basic model with complete legal environment. By the analysis we conclude that property structure will influence the incentive to deviate, and thus influence the optimal enforceable relational contract. The optimal property structure is determined by discount rate and the outside value of the specific asset. Hence it is obvious that there is important relation between the relational contract and property right. On the one hand, the relational contract will enhance the residual which is key to the settlement of the property right; on the other hand, the property structure will influence the enforcement of relational contracts. Two cases, based on the automobile industries of USA and Japan, are proposed to verify our theory.Furthermore, we expand the model to incomplete legal environment, where the observation of the courts differs from the true information of the firms. Such an inaccuracy will make a great impact on the optimal settlement for contracts and property. The proportion of relational contracts will increase when the accuracy increases. Because property structure is determined by relational contracts, we find there exists a dynamic evolvement for the property structure with the legal improvement by assuming the accuracy is influenced by the law environment. The evolvement will be affected by the relative total surplus of different propertystructures. At last we show a case of Chinese family firm to shows that there indeed exists a dynamic evolutionary process for the property rights which is hard for the existed theory but can be well explained by this paper.