"Relationship Building: Conflict and Project Choice over Time"
Working Paper,
August
2012
Publication type: Working paper
Research Archive Topic: Business Economics and Public Policy, Corporate Finance, Leadership
Abstract
The question of how to develop a relationship is central to business and management. This is especially true when the environment is characterized by informational asymmetries and subjectivity, as for example in management consulting. This paper presents a model of relationship building inspired by the consultant-client relationship. Consistent with the evidence, it shows that consultants and clients optimally start with low-risk, low-return projects, and move up to high-risk, high-return projects over time as they accumulate relationship capital. The probability of conflict and breakup is decreasing over the course of the relationship, but may jump when a higher-risk project is adopted.
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