Laura Poppo

Alternative Origins to Interorganizational Trust: An Interdependence Perspective on the Shadow of the Past and the Shadow of the Future

Despite the widespread acceptance of trust as an informal governance institution, our understanding of its origins is nascent. Our review of the literature identified two distinct explanations: Trust emerges from either a shadow of the past (i.e., prior history) or a shadow of the future (i.e., expectations of continuity). In this paper we develop and empirically examine a third perspective: The potential interdependence of these two explanations. Our results strongly endorse this third perspective. We find that prior history does not directly affect trust; instead, the observed positive relationship between the two is mediated by expectations of continuity. Consistent with this result, analyses further show that a longer prior history makes the effect of continuity on trust much stronger than a shorter prior history. We interpret these findings as suggesting: (1) the criticality and centrality of a shadow of the future (i.e., a forward-looking calculus) in generating trust in interorganizational exchanges and (2) that a shadow of the past plays a facilitating, albeit indirect, role in trust building. Our conceptual model also extends the conventional use of the transaction cost logic to show how reciprocal investments in asset specificity and uncertainty drive expectations of continuity, and consequently, interorganizational trust. Our results also show, unexpectedly, that prior history has a direct negative effect on trust after specifying the mediating path of continuity. Our moderation analysis indicates when this effect occurs: When weak expectations of continuity exist, trust is lower for exchanges characterized by a longer prior history, suggesting a potential darkside of overembedded ties.

The Many Futures of Contracts Moving Beyond Structure and Safeguarding to Coordination and Adaptation

In this article, we review the literature on interfirm contracting in an effort to synthesize existing research and direct future scholarship. While transaction cost economics (TCE) is the most prominent perspective informing the “optimal governance” and “safeguarding” function of contracts, our review indicates other perspectives are necessary to understand how contracts are structured: relational capabilities (i.e., building cooperation, creating trust), firm capabilities, relational contracts, and the real option value of a contract. Our review also indicates that contract research is moving away from a narrow focus on contract structure and its safeguarding function toward a broader focus that also highlights adaptation and coordination. We end by noting the following research gaps: consequences of contracting, specifically outcome assessment; strategic options, decision rights, and the evolution of dynamic capabilities; contextual constraints of relational capabilities; contextual constraints of contracting capabilities; complements, substitutes, and bundles; and contract structure and social process.

Examining the Conditional Limits of Relational Governance: Specialized Assets, Performance Ambiguity, and Long-Standing Ties

Despite recognition of the benefits of relational governance in inter-organizational exchanges, factors that may erode its value have received little examination. We extend the literature by asking whether self-interested opportunities and long-standing ties erode the positive association between relational governance and performance. Consistent with transaction cost and moral hazard logics, exchange hazards, particularly asset specificity and difficult performance measurement, dampen the positive association of relational governance and performance. We further find, consistent with recent inquiries into the dark side of embedded ties that the performance benefits associated with relational governance decline when parties rely on repeated partnerships.

Informal and Formal Organization in New Institutional Economics

Exchanges are governed by a set of formal institutions (contracts, incentives, authority) and informal institutions (norms, routines, political processes) that we argue are deeply intertwined.However, for the most part, informal institutions are treated as exogenous forces changing the benefits to using in an alternative formal structures, and formal institutions are treated as mere functional substitutes for informal elements governing exchanges. As a result, scholars have not sufficiently explored the interactions between formal and informal institutions. We contend that the failure to integrate these concepts into a common theory has led to faulty reasoning and incomplete theories of economic organizations. In this paper, we highlight three potential areas of research exploring the interplay between formal and informal institutions: first, whether formal institutions support (complement) or undermine (substitute for) the contributions of informal institutions; second, how vacillation in formal organizational modes allows managers to efficiently alter the trajectory of informal institutions; and third, how certain informal institutions can lead to hierarchical failure, thereby requiring managers to constrain the boundaries of the firm.

Substitutes or Complements? Exploring the Relationship between Formal Contracts and Relational Governance

Transaction cost economics advocates that greater exchange hazards be met either with more tightly crafted contracts or, when the costs of crafting and enforcing complex contracts are sufficiently high, with vertical integration. However, many argue that transaction cost economics vastly overstates the need for either integration or contractual safeguards in exchange settings commonly labeled as hazardous. In many industries, firms engage in complex, collaborative exchanges that involve rather high levels of asset specificity and are characterized by other known hazards, yet are managed without vertical integration and with limited formal contracts. These relational exchange arrangements supported by trust are viewed as substitutes for complex contracts or vertical integration. Others argue that formal contracts may in fact undermine trust and thereby encourage, rather than discourage, opportunistic behavior. 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 complementary position. Managers appear to accompany their increasingly customized contracts with increased levels of relational governance (and visa versa). Moreover, this interdependence underlies their ability to generate improvements in exchange performance. Implications as well as related hypotheses regarding the determinants of relational governance and contracts are also explored.