Improving Cooperation in Government Purchasing Through Formal‐Relational Contracting

ABSTRACT

A central challenge in government contracting is fostering cooperation between buyers and sellers where contract terms are incomplete. This article introduces a framework for formal‐relational contracting (FRC) in public sector contexts, where rigid regulations, competing values, and market imperfections make cooperation both difficult and valuable. FRC promotes cooperation through contract terms defining shared goals, guiding principles, and governance mechanisms. We present the theoretical foundations of FRC and examine its potential through 320 government contract management decision simulations where public contract managers acted as government buyers and business sellers facing sequential choices under both FRC contracts and the more conventional formal contracting approach. The results show that FRC increased managers' cooperative behavior by around 30 percentage points compared to formal contracting. Qualitative evidence further suggests that FRC shifted managers' mindsets from adversarial to cooperative. We discuss theoretical and practical implications for how FRC can enhance cooperation and mutual value in government contracting.