THE GOVERNANCE OF RAIL-FREIGHT CONTRACTS: A COMPARATIVE INSTITUTIONAL APPROACH

Contracts are rarely self-enforcing. It is both necessary and prudent for the parties to find some manner in which to guarantee their investments. Though it has long been recognized that legalistic remedies make up only a small part of the governance mechanism, the form of the non-legal structure has only recently been suggested. Following Williamson I have argued that the form of the institutional structure used to support the contractual relations depends upon the character of the transaction being effectuated. Where the transaction involves idiosyncratic investment the governance mechanism is apt to be transaction-specific. Conversely, as the investments become more standardized a concomitant reduction in governance specialization results. To test these propositions a modified case study method was employed. The data was evaluated by first analyzing the characteristics of the investment necessary to effectuate the exchange and then using this information to identify the form of the shipper-carrier transaction. Two broad classifications of transactions--standardized and idiosyncratic--were created and contracts grouped accordingly. Next the institutional structure supporting the rail-freight contracts was analyzed. The result was a careful pairing of transaction characteristics to governance mechanisms. At least three conclusions are suggested by the data. First, as Macaulay suggested years ago, contracts go beyond the four corners of the formal document. There are informal understandings, collateral to the formal terms, that are as much a part of the contract as any written term. Second, idiosyncratic and standardized transactions give rise to different governance forms. Third, the governance forms appear to be related to the characteristics of the transactions: idiosyncratic transactions give rise to specialized, transaction-specific governance that is characterized by trust relations and a realized mutuality of interest. Standardized transactions are generally governed by less specific structures that tend to be market oriented.