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Law, pride, and Contractual Relations

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Listed:
  • Naghavi, Alireza
  • Pignataro, Giuseppe
  • Zajc Kejžar, Katja

Abstract

This paper provides theory and evidence on the role of informal institutions in contract enforcement, framed as the forfeiture of pride experienced by individualistic suppliers when they underperform or misappropriate others’ technology, and their interaction with law in shaping the behavior of firms. We demonstrate that achievement-oriented pride and self-esteem, more pronounced in individualistic societies, promote vertical integration in high-technology industries while encouraging outsourcing in low-technology sectors. Formal legal mechanisms mitigate the positive influence of pride on the longevity of business relationships, especially in high-technology sectors, where they act as a crucial substitute for deterring contract violations and infringement in less individualistic societies. For low-tech inputs, stricter law enforcement increases relationship duration up to a threshold level of individualism by compelling proud suppliers to invest despite receiving an insufficient payoff for their superior effort. This effect is more pronounced when their proportion is higher, suggesting a potential complementarity between law and pride in fostering longer-term relationships.

Suggested Citation

  • Naghavi, Alireza & Pignataro, Giuseppe & Zajc Kejžar, Katja, 2025. "Law, pride, and Contractual Relations," Journal of Economic Behavior & Organization, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:jeborg:v:235:y:2025:i:c:s016726812500160x
    DOI: 10.1016/j.jebo.2025.107041
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    Keywords

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    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • Z10 - Other Special Topics - - Cultural Economics - - - General
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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