Interfirm Monitoring, Social Contracts, and Relationship Outcomes

Abstract

This article examines the effects of monitoring on interfirm relationships. Whereas some research suggests that monitoring can serve as a control mechanism that reduces exchange partner opportunism, there is also evidence showing that monitoring can actually promote such behavior. The authors propose that the actual effect of monitoring depends on (1) the form of monitoring used (output versus behavior) and (2) the context in which monitoring takes place. With regard to the form of monitoring, the results from a longitudinal field study of buyer–supplier relationships show that output monitoring decreases partner opportunism, as transaction cost and agency theory predict, whereas behavior monitoring, which is a more obtrusive form of control, increases partner opportunism. With regard to the context, the authors find that informal relationship elements in the form of microlevel social contracts serve as buffers that both enhance the effects of output monitoring and permit behavior monitoring to suppress opportunism in the first place.

“Trust but verify”? The performance implications of verification strategies in trusting relationships

“…1. Our contentions are consistent with more general insights developed in marketing (Heide et al 2007;Noordewier et al 1990;Wang et al 2008) and related fields (Ittner et al 1999;Poppo and Zenger 2002) that contend performance in an exchange is enhanced when congruence is present between the mechanisms of governance employed and the underlying circumstances of the exchange.…”

“…Information of particular relevance in trusting relationships includes knowledge about the performance capabilities of the other party, information regarding the other party's intended behavior and information from third parties concerning the trusted party. Marketing scholars have also emphasized the role of information production to address exchange vulnerability (Aiken and Boush 2006;Bergen et al 1992;Heide et al 2007;Rao and Monroe 1996). In these circumstances, information supplements and fills in gaps created by trust (cf.…”

“…We predicted the effects of trust and monitoring in combination would be detrimental to performance (Heide et al 2007). Finding valid arguments that the two forms of governance operated as substitutes and may be incompatible, we proposed that the effects of monitoring would diminish when trust was higher.…”

“…(1) monitoring a supplier's outputs, (2) openly sharing information, or (3) actively monitoring the supply market, including current and potential suppliers, for information (Abbott 1993;Rose 1995;Heide et al 2007;Ittner et al 1999;Merchant 1990).…”

“…For example, in transaction cost economics, market governance is preferred unless an exchange involves a high level of asset specificity-at which point the market fails and a hierarchical solution of vertical integration or detailed contracts (Stinchcombe 1985) becomes the optimal governance choice (Williamson 1985). The complementarity perspective contends that governance may be crafted with multiple mechanisms that address different governance problems and complement or reinforce one another and offer superior control (Heide et al 2007;Lazzarini et al 2004). The latter perspective typically considers a broader set of performance outcomes, emphasizing effectiveness in addition to traditional efficiency concerns.…”