Research Article
Do formal contracts and relational governance function as substitutes or complements?
Laura Poppo,
Todd Zenger,
Corresponding Author
Laura Poppo
Pamplin College of Business, Virginia Tech, Blacksburg, Virginia, U.S.A.
Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061, U.S.A.Search for more papers by this authorTodd Zenger
John M. Olin School of Business, Washington University, St Louis, Missouri, U.S.A.
Search for more papers by this author
Laura Poppo,
Todd Zenger,
Corresponding Author
Laura Poppo
Pamplin College of Business, Virginia Tech, Blacksburg, Virginia, U.S.A.
Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061, U.S.A.Search for more papers by this authorTodd Zenger
John M. Olin School of Business, Washington University, St Louis, Missouri, U.S.A.
Search for more papers by this authorAbstract
Relational exchange arrangements supported by trust are commonly viewed as substitutes for complex contracts in interorganizational exchanges. Many argue that formal contracts actually undermine trust and thereby encourage the opportunistic behavior they are designed to discourage. In this paper, we develop and test an alternative perspective: that formal contracts and relational governance function as complements. Using data from a sample of information service exchanges, we find empirical support for this proposition of complementarity. Managers appear to couple their increasingly customized contracts with high levels of relational governance (and vice versa). Moreover, this interdependence underlies their ability to generate improvements in exchange performance. Our results concerning the determinants of these governance choices show their distinct origins, which further augments their complementarity in practice. Copyright © 2002 John Wiley & Sons, Ltd.
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