Do formal contracts and relational governance function as substitutes or complements?
Article first published online: 1 MAY 2002
Copyright © 2002 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 23, Issue 8, pages 707–725, August 2002
How to Cite
Poppo, L. and Zenger, T. (2002), Do formal contracts and relational governance function as substitutes or complements?. Strat. Mgmt. J., 23: 707–725. doi: 10.1002/smj.249
- Issue published online: 25 JUN 2002
- Article first published online: 1 MAY 2002
- Manuscript Accepted: 12 DEC 2001
- Manuscript Received: 3 FEB 2000
- transaction cost economics;
- relational governance
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.