Communication and Contracting: A Link Between Business and Social History

The relationship between business tructures and their social and cultural setting has long interested economic historians. North [16] and Williamson [24] place information concerns at the center of their analyses of organizations and institutions. According to North, institutional arrangements, which consist of formal and informal constraints (respectively laws and behavioral codes), represent communicating infrastructures that influence transaction costs. Williamson explores how economic actors arrange, monitor, and enforce contracts in the midst of asymmetrical information and uncertainty. These agreements are shaped by the degree of asset specificity, the frequency of exchange, and what he calls "atmosphere" (the degree of prevailing trust). Atmosphere can have an important transaction cost reducing function, especially when ex post contingencies arise and induce sequential adjustments. Contracts are therefore not always one off deals. Instead, they may represent a relationship that sustains ongoing collaborative modification. Indeed, game theory reveals that escape from the Prisoner's Dilemma depends upon co-operation [15]. Players will adopt a defection strategy in a single period game because they do not trust each other, but in a repeated game, conditional co-operation can become the equilibrium position if both parties envision an indefinite time horizon and if the discount rate is low enough to prevent defection. What is left unexplored, however, is how players communicate to forge an initial co-operative contract and signal that they observe an indefinite time horizon. Building on foundations provided by Williamson and North, this paper uses the notion of "contracting capability" to examine the relationship between contracting and communicating. Using evidence from nineteenth century Britain's service sector, it aims to build a closer link between business and social history by showing explicitly how relevant institutions provided an elaborate communicating infrastructure that reduced transaction costs. So favored, businessmen in the shipping industry won international competitive advantages using co-operative network based contractual arrangements. The findings provide an alternative perspective from which to consider entrepreneurial performance, family enterprise, social mobility, and organizational innovation.