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Volume 10, Issue 46;   November 17, 2010: Durable Agreements

Durable Agreements

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People at work often make agreements in which they commit to cooperate — to share resources, to assist each other, or not to harm each other. Some agreements work. Some don't. What makes agreements durable?
The Japanese battleship Yamato during machinery trials 20 October 1941

The Japanese battleship Yamato during machinery trials off Bungo Strait, 20 October 1941. To avoid an arms race, the great naval powers had agreed to a sequence of treaties from 1922 to 1936 constraining the sizes and numbers of capital ships they could construct. In 1934, Japan withdrew from the treaty (and the League of Nations), and in 1937 began construction of the Yamato. Its great size was intended to enable it to engage multiple U.S. warships simultaneously, a capability that was believed necessary because of the industrial capacity advantage of the U.S. Thus, although the battleship treaties provided incentives to signatories to adhere to the treaties, for Japan there were even greater incentives to abandon them. For more, read the Wikipedia articles, "Treaty battleship" and "Japanese Battleship Yamato." The photo is part of the records in the Yamato Museum (PG061427). It is available from Wikipedia.

If you're responsible for people or resources — most of us are responsible for at least ourselves — you probably make commitments at work. You commit to do something (or not to), at a certain pace, or by a certain date, or within some constraints. Sometimes the commitment is part of an exchange: I'll do this, and you'll do that; or I won't do this, and you won't do that; and so on.

When commitments are part of exchanges, we sometimes call them informal agreements. Rarely are they written down, though they might be; rarely are there handshakes, though there might be. Most agreements actually work. What makes agreements durable? Here are some of their attributes.

They're bilateral
Bilateral agreements are based on mutual consent. In a unilateral agreement one of the parties believes there is an agreement, but the other doesn't, or is unaware of any agreement. For durability, both parties must be aware that a deal has been struck.
They're clear
Even if both parties acknowledge existence of an agreement, they might not agree on the terms. It's essential that all concerned agree about what's being exchanged, and how it will be exchanged.
They're voluntary
Neither party is coerced — not by the other, nor by events, nor by another party. If coercion drives the bargain, the agreement is durable only while coercion persists.
The parties are equally knowledgeable
Each party has roughly Even if both parties acknowledge
existence of an agreement,
they might not agree
on the terms
equal information about the value of the items exchanged and the framework of the exchange. That is, both parties estimate the agreement's fairness equally accurately. If one party has better information than the other, then when the second party "wakes up," the deal often implodes, or the relationship sours.
Incentives have symmetric value
When the agreement includes incentives, the value of the incentives to each party is roughly identical. Incentives that mean much more to one party than the other are likely to lead to non-performance by the party that has lesser regard for its incentives.
There are no incentives for breach of confidentiality
When the agreement is confidential and sub rosa a trap awaits, because there can be an incentive to breach confidentiality. The first party to admit to a sub rosa agreement can sometimes avoid the penalties of having made such an agreement, even after harvesting value from it.

Most important, there can be no incentive for one party to turn against the other. If one party can capture value by inflicting harm on the other, the agreement is inherently unstable. It becomes a form of "I'll scratch your back; you stab me in mine." Durable agreements are structured such that turning on one's partner is very, very expensive. Go to top Top  Next issue: Beyond Our Control  Next Issue

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