How inter-firm co-operation depends on social embeddedness: A vignette study

This paper examines the effects of the social context of economic exchange on the governance of transactions In buyer-supplier relations between firms . We distinguish three dimensions of social embeddedness of transactions, n amely, repeated exchange between the partners (temporal embeddedness), rela tions with third parties such as other firms (network embeddedness) and soc ial institutions that allow for credible agreements and commitments (instit utional embeddedness). Together with transaction characteristics, social em beddedness shapes trust problems in economic exchange and how firms mitigat e such trust problems through contractual planning. More precisely, we anal yse how transaction characteristics and social embeddedness affect effort i nvested in contractual planning. We argue that social embeddedness provides alternatives for costly contractual planning, such as reciprocity and cond itional co-operation. Forty purchase managers participated in a factorial s urvey. Virtual transactions were presented. Each transaction was represente d by a vignette composed of eight characteristics, the levels of which were varied randomly. Three characteristics represented 'economic' features of transactions, namely, transaction-specific investments, monitoring problems and volume of the transaction. Five vignette characteristics represented s ocial embeddedness: the history of previous transactions between the partne rs, expected future transactions, voice and exit networks and a rough indic ator of institutional embeddedness. The purchase managers had to judge how much time negotiations would take, and also how many departments would be i nvolved, Results show that social embeddedness leads a purchase manager to put less effort into the management of the transaction. While one-sided spe cific investments, monitoring problems and the Volume of a transaction indu ce more negotiation efforts, such efforts decrease if transactions are embe dded 'better' in a temporal or network sense, or if buyer and supplier can rely on more institutional embeddedness.