The king's laws yield to village customs: An exploratory study of relational contracting in sustainable forestry

Vietnam's forestry sector faces unique governance challenges due to a landscape characterized by highly dispersed smallholder ownership, contrasting with concession-based models. As international markets increasingly demand sustainability certifications (e.g. FSC or PEFC), cost and complexity deter most smallholders, prompting wood processing firms to finance certification themselves. Such investments of processing firms can be at risk of opportunistic behaviour by smallholders who may side-sell at harvest. The risk can be compounded by weak legal enforcement. Drawing on transaction-cost economics and network theory, we employ a relational contracting lens to examine how such agreements persist. We analyse 15 key stakeholder interviews and six documents. We find evidence that contract stability rests less on legal stipulations and more on relational mechanisms: flexible contingent terms, co-investment in technical capacity, and embedded governance via local authorities and social networks. These informal institutions and networked enforcement substitute for formal mechanisms, enabling sustainable long-term contracting in emerging markets. • Vietnam's certified timber supply hinges on relational, not formal, negotiations. • Flexible terms and co-investment counter “reverse hold-up” in timber deals. • Social networks and local authorities provide informal contract enforcement. • Informal governance enables certification in fragmented smallholder forestry.