This article focuses on the predominance of obligated relational contracting in Japanese
business. Consumer goods markets are highly competitive in Japan, but trade in intermediates,
by contrast, is for the most part conducted within long-term trading relations in
which goodwill give-and-take is expected to temper the pursuit of self-interest.
Cultural preferences explain the unusual predominance of these relations in Japan,
but they are in fact more common in Western economies than textbooks usually recognize.
The growth of relational contracting in labour markets especially is, indeed, at
the root of the rigidities supposedly responsible for contemporary stagflation. Japan
shows that to sweep away these rigidities and give markets back their pristine vigor
is not the only prescription for a cure of stagflation. The Japanese economy more
than adequately compensates for the loss of allocative efficiency by achieving high
levels of other kinds of efficiency. Relational contracts are just a way of trading
off the short term loss involved in sacrificing a price advantage, against the insurance.
As for relational contracting between enterprises, there are three things to be said.
First, the relative security of such relations encourages investment in supplying
firms. Second, the relationships of trust and mutual dependency make more for a rapid
flow of information. Third, a by-product of the system is a general emphasis on quality.