Between contracts and trust: Disentangling the safeguarding and coordinating effects over the relationship life cycle

Abstract

Despite a rich tradition in studying contract-trust nexus, the mutual relationship between these two modes of governance remains equivocal. Adopting a dual-functional and relationship-phase-contingent view of contracts, we theorize that firms' perception of the chief function of contracts varies throughout the relationship life cycle, which results in a relationship-phase-contingent contract-trust nexus. We tested our hypotheses with data collected from the supplier-retailer dyads using quasi-longitudinal analysis. The results indicate that contracts substitute goodwill trust in the exploration phase because of the significantly negative effect of the safeguarding function, whereas in the expansion phase, contracts complement goodwill trust because the positive effect of the coordination function dominates. In the maturity phase, because the effects of the two functions on goodwill trust are both significant, with neither of them dominating the total effect, the net effect of contracts on goodwill trust becomes insignificant. Overall, we provide new insights into when and how contracts complement or substitute goodwill trust throughout the relationship life cycle.