Relational Contracting and the Myth of Trust: Control in a Co-Opetitive Setting

58 Pages Posted: 8 Sep 2016

See all articles by Jennifer Grafton

Jennifer Grafton

The University of Melbourne

Julia Mundy

University of Greenwich

Date Written: September 6, 2016

Abstract

In this paper, we investigate the role of formal and relational contracts in managing alliance risks that arise in co-opetitive collaborations. We undertake a case study of a co-opetitive sales alliance within the independent publishing sector, incorporating data from all firms to the alliance. We provide empirical evidence of the relational risks of misappropriation and opportunism as manifest in both vertical (buyer-supplier) and horizontal activities within the alliance and identify a further relational risk relating to concerns of introducing homogeneity into the product offerings of firms. We also examine the nature of compliance and regulatory risk, which is salient in this setting given the potential for anti-competitive behaviour towards customers and suppliers. We find that the firms mitigate alliance risks primarily through the use of relational contracts (informal self-enforcing agreements). Formal contracts are evident in the buyer-supplier relationship, but are used mainly for ex post co-ordination. We adopt an organisational economics perspective to explain the specific mechanisms that support relational contracting between the firms. We find that shared values, implicit understandings, restricted membership, meetings, and collective sanctions encourage the firms to demonstrate commitment to the alliance, to diffuse information about partners’ behaviours, and, crucially, to monitor partners. Informal agreements between partners are sustained by self-regulating behaviours, reinforced by the ‘shadow of the future’ in that firms have a great deal to gain from continued participation in the alliance and face losses if excluded. Notably, our findings support economic arguments that trust is a weak proxy for observable control mechanisms. Our study contributes to knowledge of the management of inter-firm risks in two significant ways. First, we draw on our empirical findings to develop an organising framework that presents a means of systematically investigating the mechanisms and factors that support the use of relational contracts. Second, by employing an economics approach to the management of alliance risks, we are able to present a richer and potentially more compelling view of inter-firm control than is traditionally presented in studies that rely on intra-firm notions of social controls, in particular trust.

Keywords: Inter-Organisational Relationships, Co-Opetition, Formal Contracts, Relational Contracting, social Controls, Trust, Enlightened Self-Interest

Suggested Citation

Grafton, Jennifer and Mundy, Julia, Relational Contracting and the Myth of Trust: Control in a Co-Opetitive Setting (September 6, 2016). Management Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2835715

Jennifer Grafton

The University of Melbourne ( email )

198 Berkeley Street
The University of Melbourne, Victoria 3010
Australia

Julia Mundy (Contact Author)

University of Greenwich ( email )

30 Park Row
Greenwich
London, SE10 9LS
United Kingdom

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