The Role of Relationship Scope in Sustaining Relational Contracts in Interfirm Networks

A key strategic decision for many firms is the breadth of their relationships with partners. Existing theories of relationship scope are limited in that they disregard two key aspects of interfirm networks: (1) that most firms transact within networks of multiple partners, and (2) that these partnerships involve two-sided moral hazard. We develop a theory of partnership scope in interfirm networks that addresses these deficiencies. We show how, by broadening the scope of business it conducts with a partner, a firm can reduce externalities between partners and thereby sustain a self-enforcing exchange relationship with that partner (a “relational contract”) in which both parties cooperate with each other repeatedly and maximize the value created by the relationship. We discuss numerous empirical settings in which our model applies, including franchising, supply chains, and platform-based ecosystems