Strategic performance effects of misaligned formal contracting: The mediating role of relational contracting

Abstract

Authors are permitted to self-archive the peer-reviewed (but not final) version of a contribution on the contributor's personal website, in the contributor's institutional repository or archive, subject to an embargo period of 24 months for social science and humanities (SSH) journals and 12 months for scientific, technical, and medical (STM) journals following publication of the final contribution. Although all errors remain our own, we gratefully acknowledge Robert Dahlstrom, Matilda Dorotic, Mrinal Ghosh, Auke Hunneman, Silja Korhonen-Sande, Rutger van Oest, Peter C. Verhoef, Kenneth H. Wathne, and participants at the 2010 Johan Arndt Conference, the 2010 ISNIE Conference, and two faculty seminars at the Department of Marketing, BI Norwegian Business School, for their constructive and useful comments on earlier drafts of this paper. This research initially began while the first author was employed at the Department of Ecology and Natural Resource Management at the Norwegian University of Life Sciences. This research would not have been possible without a generous grant from the Forestry Development Fund of Norway. The authors are indebted to the previous editor, Marnik G. Dekimpe, the current editor, Eitan Muller, the area editor, Sandy D. Jap, and two anonymous reviewers. Highlights: Firms experience significant losses due to misaligned formal contracting. Misalignment matters more for end-product enhancements than for cost reductions. Relational contracting mediates the negative performance effects of misaligned formal contracting. ABSTRACTStudies show that failing to align formal contracts with transaction attributes reduces relationship performance. However, few studies consider either how the effects of misalignment differ across outcome types or the mechanisms through which misalignment affects performance. This study examines the effects of misaligned formal contracting on two types of outcomes, i.e., end-product enhancements and cost reductions, and on one mechanism through which misalignment affects performance, i.e., relational contracting.Using survey data from 305 buyer-supplier relationships in the Scandinavian wood industry, the findings suggest that (1) misalignment has a significantly stronger negative effect on endproduct enhancements than on cost reductions, and (2) relational contracts mediate the effect of misaligned formal contracting on performance. Firms in the sample experience significant misalignment-related losses of 10.3% and 5.3% in end-product enhancements and cost reductions, respectively. The findings suggest that misalignment is particularly harmful to performance outcomes that rely on relational contracting, such as end-product enhancements.

New Product Creativity: Understanding Contract Specificity in New Product Introductions

“…Specifically, our findings shed light on the relationship between contractual and relational governance by detailing the influence of contract specificity on relational behaviors over time (aspects not taken into account by Lusch and Brown 1996 or Poppo and Zenger 2002). Furthermore, by departing from prior research that has predominantly studied how relational behaviors influence performance (e.g., Bercovitz, Jap, and Nickerson 2006; Hoppner and Griffith 2011; Lusch and Brown 1996; Sande and Haugland 2015), this work extends the literature by examining the moderating role of new product success on the relationship between contract specificity and relational behaviors. As such, we provide a more robust perspective of ongoing manufacturer–retailer relationships.…”

“…This finding extends the extant literature (e.g., Buvik and John 2000; Gulati and Singh 1998; Lusch and Brown 1996; Mooi and Ghosh 2010; Poppo and Zenger 2002) by providing a better understanding of how retailers behave under contractual terms. Specifically, our findings indicate that retailers will scale back investments that are not easily measurable (e.g., relational behaviors) when contracts are less specific, laying a foundation for further research that could examine contract (mis)alignment (cf., Ghosh and John 1999; Sande and Haugland 2015) and its influence on relational governance over time.…”

“…Because not all contingencies can be contractually planned for (Grossman and Hart 1986), coordination between exchange partners is facilitated through not only formal contracts but also relational behaviors (e.g., Bercovitz, Jap, and Nickerson 2006; Jap and Ganesan 2000; Lusch and Brown 1996; Poppo and Zenger 2002; Sande and Haugland 2015). Thus, we contend that contract specificity influences a retailer's engagement in relational behaviors throughout the duration of the contract (thus addressing the complementarity of contracts and relational governance, as indicated by Poppo and Zenger 2002).…”

The varying roles of governance mechanisms on ex-post transaction costs and relationship commitment in buyer-supplier relationships

“…Contract completeness and symmetric dependence, as economic mechanisms, demonstrate mutually specified contractual clauses and relationship specific investments (Brown et al, 2000;Liu et al, 2017b). Contractual governance is albeit ubiquitous and offers an institutional framework, regulating course of relationship exchange (Luo, 2009;Liu et al, 2017b), it varies in the level of completeness, complexities (Crocker & Reynolds, 1993), rigidity, and flexibility (Sande & Haugland, 2015). Several researchers have maintained that contracts will always be incomplete due to inevitable unpredictability (Crocker & Reynolds, 1993;Luo, 2009).…”

The Joint Effects of Ex Ante Contractual Completeness and Ex Post Governance on Compliance in Franchised Marketing Channels

“…Research in marketing has indicated the potential endogeneity of governance, given that the alignment between governance mechanisms and transactional characteristics can result in better performance (e.g., Mooi and Gilliland 2013; Sande and Haugland 2015). Acknowledging this possibility, we explicitly test for the exogeneity of the contractual completeness and monitoring and enforcement constructs separately for each equation, with perfunctory and consummate compliance as dependent variables, using instrumental variables (IVs) (Sargan 1958), a procedure commonly used to address endogeneity concerns.…”