Reference no: EM133189209

Companies always face a dilemma when deciding whether to fulfill their own inputs or whether to ask other companies to meet their input needs. When the company decides to buy inputs and even support the production process through other companies, then the company will draw up a contract with the vendor (input supplier). One of the functions of the contract is an effort to minimize the opportunistic behavior of each party involved in the contract.

1. An expert stated that in the real world contracts can be perfectly structured considering that humans tend to be rational. Even if there is asymmetric information in the field, according to the expert, asymmetric information is basically easy to overcome. Similar things to changes in the future can be estimated carefully. How to explain this?
2. Other experts stated that the contract basically does not need to be made perfect, considering that if the contract is perfect it will reduce the close relationship with the stakeholders who have been working together. The expert also stated that in terms of risk management, the risk of worsening relations with stakeholders due to contracts is more weighted than the legal risks that may occur due to contract violations. How to explain this?