The Governance Roles and Outcomes of Contracts and Contracting Process in Interoriganizational Relationships


Student thesis: Doctoral Thesis

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Awarding Institution
Award date27 Jun 2017


Contractual governance is a multifunctional mode that works not only as a safeguard against opportunism but also as a coordination device to address bounded rationality. It has significant influence as well on trust development. However, despite its prevalence, questions still remain as to (1) which function of contracts will prevail and when, (2) whether contracts are a trust-enabler or a trust-inhibitor, as well as (3) whether and how the contracting process can provoke trust prior to the formation of a contractual relationship. To fill these gaps, three essays are included in this dissertation.

Essay One, by associating the functions of contracts as safeguarding with equity or coordination with efficiency, explores how interdependence moderates the relative effectiveness of contracts in achieving equity versus efficiency. Analyzing data collected from household appliance retailers with hierarchical regression models, the essay offers preliminary evidence of the interdependence-contingent role of contracts. Certeris paribus, as joint dependence increases, higher contract complexity yields steady gains in equity and increasing gains in efficiency, suggesting the growing salience of the coordination function; whereas as dependence asymmetry increases, it yields increasing gains in equity and steady gains in efficiency, reflecting the growing salience of the safeguarding function.

To reconcile the debate surrounding the effect of contracts on trust, Essay Two theorizes that the chief function of contracts will vary as a relationship unfolds, leading to a relationship phase-contingent contract-trust nexus. The essay shows that contracts inhibit trust in the exploratory phase and facilitate trust in the expansion phase but have a neutral effect on trust in the mature phase. It offers nuanced insights into when and how contracts facilitate or inhibit trust throughout the relationship lifecycle.

Moving its research perspective beyond the post-formation phases, Essay Three further shows whether and how the contracting process can influence trust development before the relationship formation. Analyzing data collected from IT service providers using hierarchical regression models, the essay shows that a firm’s revealed contract design capability functions to breed both goodwill trust and competence trust in the contracting process. However, when the firm’s dependence advantage increases, the capability will perform worse at yielding goodwill trust and better at yielding competence trust. These results empirically uncover the antecedents that breed trust in the contracting process, challenge the notion that trust requires familiarity and depends on positive relationship development, and move the initial period for trust to emerge to the pre-formation phase.

Overall, this dissertation enriches our understanding of the contingent roles and outcomes of contracting, expands the debate on the relationship between contracts and trust, and gives empirical evidence to the question of whether and how trust emerges in the contracting process.

    Research areas

  • Contractual governance, Trust, Interdependence, Contract design, Relationship life cycle, Equity, Efficiency