Real Effects of Relational Contracts

How important are factors such as "firm culture" and "employee engagement" in driving firm performance? Increasing evidence from a wide range of fields suggests that productivity differs widely across firms, even after the inclusion of careful controls for factors such as capital intensity. Additionally, labor quality and the structure of demand and a long tradition of work in organizational behavior suggests that the successful adoption of productivity enhancing managerial practices requires complementary changes in the firm's "culture" or in the structure of social relationships within the firm. Recently Gibbons and Henderson (2013) have suggested that one way to formalize this insight is through a focus on the role of relational contracts within the firm. They hypothesize this implies that the performance effects of management practices will be contingent on the presence of appropriate relational contracts within the firm. In this paper we report the first results from a research program designed to test the empirical validity of this idea. We use the quasi-randomized roll out across multiple sites within a single firm of an intervention designed solely to change the nature of the social relationships within the site—an intervention we interpret as changing the relational contracts in place—to ask whether changing relational contracts alone has an effect on performance. We present some evidence suggesting that they do.