Sustaining relationships after opportunism and misunderstanding : the role of formalization and socialization

This study compares the effects of governance mechanisms on relationship continuity in the aftermath of exchange interruptions in interfirm relationships. We propose that cooperative relationships can be renewed by matching governance mechanisms (formalization or socialization) to specific types of exchange interruptions (opportunism and misunderstanding). Using data collected from two types of senior managers in 304 buyer firms in China (a total of 608 senior managers), we found that the effects of formalization and socialization on relationship continuity are contingent on exchange interruption type. Socialization is more effective than formalization in renewing relationships when the level of opportunism is high, while formalization works better than socialization when the level of misunderstanding is high. Based on our findings, we encourage firms to diagnose exchange interruption types and then choose a proper governance structure.