Pragmatic collaborations: advancing knowledge while controlling opportunism

Abstract

This paper starts from the observation that firms are increasingly engaging in collaborations with their suppliers, even as they are reducing the extent to which they are vertically integrated with those suppliers. This fact seems incompatible with traditional theories of the firm, which argue that integration is necessary to avoid the potential for hold-ups created when non-contractible investments are made. Our view is that pragmatist mechanisms such as benchmarking, simultaneous engineering and 'root cause' error detection and correction make possible 'learning by monitoring' - a relationship in which firms and their collaborators continuously improve their joint products and processes without the need for a clear division of property rights. We argue that pragmatic collaborations based on 'learning by monitoring' both advance knowledge and control opportunism and thus align interests between the collaborators.