Risk, Partner Selection and Contractual Control in Interfirm Relationships

Abstract

This study examines firms’ use of partner selection and formal contracts as key approaches to manage transaction risk in interfirm relationships. We specifically examine the impact of transaction characteristics that generate transaction risk on 1) the importance placed on different selection criteria in the choice of collaboration partner, and 2) the complexity of contracts used to manage the collaboration. Survey data support that when confronted with greater risk from the transaction context, firms place more emphasis on trust-based and reputation-based selection criteria for partner choice and develop more complex (i.e., more inclusive and specific) contracts to manage the collaboration. Furthermore, our results show that partner selection mediates the effects of transaction characteristics on contract complexity, consistent with the argument that the information acquired during the partner selection process in response to risk facilitates the design of contracts to manage risk.

Keywords: transaction risk, interfirm relationships, partner selection criteria, contract complexity

JEL Classification: M4