The paper by Baker, Gibbons, and Murphy explores the prevalence and impact of relational contracts within and between firms. Relational contracts are informal agreements that rely on the value of future relationships and are common in both intra-firm and inter-firm transactions. The authors develop repeated-game models to analyze how these contracts differ between firms that are vertically integrated (integrated) and those that are not (non-integrated). They find that integration affects the parties' temptation to renege on a relational contract, influencing the best contract that can be sustained. Specifically, integration can reduce the reneging temptation, making it more feasible to implement a desirable relational contract. This suggests that vertical integration can be an instrument to facilitate better relational contracts. The paper also discusses the implications of these findings for joint ventures, alliances, and networks, as well as the role of management within and between firms. It highlights that relational contracts allow parties to adapt to new information and utilize their detailed knowledge of specific situations, but they cannot be enforced by a third party, requiring self-enforcement through the value of future relationships. The authors derive several key results, including that vertical integration is efficient when supply prices vary widely, as it reduces reneging temptations. They also show that high-powered incentives can increase reneging temptations under integration, leading to smaller performance payments in relational incentive contracts compared to markets. Additionally, the optimal integration decision can depend on the discount rate and payoff levels, and firms may struggle to improve upon even mediocre spot-market outcomes due to the availability of a fallback option after reneging. Finally, the paper concludes by discussing the broader implications of relational contracts for organizational forms, internal processes, and the role of managers in the economic theory of the firm.The paper by Baker, Gibbons, and Murphy explores the prevalence and impact of relational contracts within and between firms. Relational contracts are informal agreements that rely on the value of future relationships and are common in both intra-firm and inter-firm transactions. The authors develop repeated-game models to analyze how these contracts differ between firms that are vertically integrated (integrated) and those that are not (non-integrated). They find that integration affects the parties' temptation to renege on a relational contract, influencing the best contract that can be sustained. Specifically, integration can reduce the reneging temptation, making it more feasible to implement a desirable relational contract. This suggests that vertical integration can be an instrument to facilitate better relational contracts. The paper also discusses the implications of these findings for joint ventures, alliances, and networks, as well as the role of management within and between firms. It highlights that relational contracts allow parties to adapt to new information and utilize their detailed knowledge of specific situations, but they cannot be enforced by a third party, requiring self-enforcement through the value of future relationships. The authors derive several key results, including that vertical integration is efficient when supply prices vary widely, as it reduces reneging temptations. They also show that high-powered incentives can increase reneging temptations under integration, leading to smaller performance payments in relational incentive contracts compared to markets. Additionally, the optimal integration decision can depend on the discount rate and payoff levels, and firms may struggle to improve upon even mediocre spot-market outcomes due to the availability of a fallback option after reneging. Finally, the paper concludes by discussing the broader implications of relational contracts for organizational forms, internal processes, and the role of managers in the economic theory of the firm.