Contracts, as a result, are likely to be an enticing ‘go-to” for business transactions, but firms still prefer non-contractual relations. The reason why firms avoid contracts, even when they seem like a valuable solution, is because many of the issues can be resolved much more easily without the need for a contract. For instance, firms have a general understanding of their primary commitments in a business transaction. However, there can be a misunderstanding between buyers and sellers, “So it is to have contracts, right?” The answer for many firms is still a no, because products can be standardized and if they aren’t, the buyer can explicitly state their expectations/tolerances for production. “But what about defaults, how can they be addressed?” Defaults for many firms are not likely to be catastrophic, even if there’s a high cost, because firms can prepare for defaults through risk avoidance and or risk spreading. For example, a buyer may place the same order among multiple suppliers so that production can keep …show more content…
Although, contracts may seem as the supreme method to ease transactions between firms; firms tend to engage in non-contractual relations for that very reasons. For most firms, non-contractual relations allow for flexibility in transactions. In addition to a more a cooperative environment between firms, non-contractual relations allow for the enforcement of effective non-legal sanctions and issues such as default are resolved much more easily without