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Do Formal Contracts and Relational Governance Function as Substitutes or Complements?

Journal(s): Strategic Management Journal
Published: May 1, 2002
Author(s): Laura Poppo, Todd Zenger

General Description
Using survey data, Dr. Laura Poppo, professor of management and Donald and Shirley Clifton Chair in Leadership, and her co-author demonstrate the necessity of both, as contracts create transparency and formalize expectations and processes. Yet, because contracts are incomplete, trust and norms such as sharing information and a collaborative working relationship are imperative.

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Academic Abstract
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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