The Role of Precontractual Signals in Creating Sustainable Global Supply Chains

Global supply chains enhance value, but are subject to governance problems and encourage evasive practices that deter sustainability, especially in developing countries. This article proposes that the precontractual environment, where parties are interested in trade but have not yet negotiated formal terms, can enable a unique process for building long-term sustainable relations. We argue that precontractual signals based on relation-specific investments, promises of repeated exchange, and reassuring cheap talk can be leveraged in precontract by the power of framing. We show how these framing signals are amplified in precontract because the lack of credible information, minimal time for reflection, and the role of risk-aversion present in supply chain contract negotiations. The result is a process that is uniquely productive for building long-term and value-generating contractual relations in supply chains, particularly in skeptical or even hostile negotiating contexts. We then show how framed precontractual signals generate a joint contractual surplus through a supernormal profit known as a relational rent. This rent can be invested to improve sustainable practices, an efficient option in a competitive market due to the second order effects that sustainable practices generate. This novel process we propose thus potentially generates superior returns to other trust measures and encourages focus on precontract as a fertile environment for building sustainable investments.