In a generation’s time, collaborative methods of innovation have become a centerpiece of modern economic organization. Rather than creating technology primarily in-house, companies often enter into complex contractual arrangements whereby innovation processes cross firm boundaries. This collaborative approach gives a firm access to external expertise without executing a full acquisition.

Collaboration poses a puzzle for theories of economic organization. On one hand, uncertainty is significant when firms are jointly creating new technology, which makes formal contracts highly incomplete. On the other hand, innovation networks often appear too dynamic and heterogeneous for the typical prerequisites for informal constraints to readily obtain. How then are innovation networks governed?

In an important series of articles, Ronald Gilson, Charles Sabel, and Robert Scott argue that collaborating firms have devised a new variant of relational contracting to govern their joint efforts. This new governance form carefully blends formal agreements with informal contracts. The formal contract only indirectly governs the collaboration: instead of determining performance obligations, unique contractual provisions create an information-sharing regime that facilitates the development of informal constraints. In their parlance, formal contracts “braid” with informal social norms.

Braided contracting theory is a provocative conceptual advance, but questions arise when it is applied beyond the case studies upon which Gilson et al. base their argument. A broad analysis of alliance agreements reveals that many alliances do not include braiding mechanisms in situations where Gilson et al.’s theory would expect them, raising the question of how to understand alliance diversity. This Article argues that variation in alliance design is not surprising, however, if one takes a wider-ranging view of the exchange hazards collaborators face. Braided contracting theory’s limitation is that it conceives of the exchange problem only in terms of opportunism problems. Building upon overlooked scholarship, this Article argues that exchange hazards in innovation networks are multidimensional. Rather than serve as tools for fostering informal constraints on opportunism, the unique provisions observed in alliance contracts directly address a broad confluence of problems collaborators face. Variation in alliance design is then understood as the result of those multiple exchange hazards recombining in different intensities across collaborations. This broader perspective of the contracting problem not only better explains the details of network governance but also refocuses our attention on an important if unappreciated source of innovation networks’ fragility—the complex, often tenuous, interdependence between governance mechanisms.

This novel theory of the contractual infrastructure supporting innovation networks also has immediate normative implications. Foremost, it clarifies important aspects of the case law involving disputes between collaborators, which prior scholarship has overlooked. Courts adjudicating disputes between collaborators do not pursue minimalistic intervention designed to protect informal relational contracts as Gilson et al. argue, but rather directly address collaborative dysfunction in its full multidimensionality by leveraging multiple doctrines at once. Consistent with this reading of the case law are the unique dispute resolution systems often included in collaboration agreements. Those systems frequently bifurcate (or even trifurcate) dispute resolution on substantive grounds between different private and public tribunals. In short, the enforcement infrastructure is as multifaceted as the alliance agreements themselves. The result is a vision of innovation’s private ordering that is more complex and theoretically rich than previously imagined.

 

Read the full article.