How contract enforcement reduces opportunism? The paradoxical moderating effect of interfirm guanxi

Abstract

This study investigates the hitherto largely neglected effects of contract enforcement in interfirm relationship. Based on contract functions, we conceptualize contract enforcement as a two-dimensional construct comprising contractual control enforcement and contractual coordination enforcement. We examine how the effects of these two enforcements differ as the level of interfirm guanxi varies. The findings from a survey of 190 buyers in China suggest that both contractual control enforcement and contractual coordination enforcement mitigate sellers' opportunism. Moreover, contractual coordination enforcement is more effective in reducing opportunism when the interfirm guanxi is strong, whereas contractual control enforcement is more effective in reducing opportunism when the interfirm guanxi is weak. Our research contributes to both theory and practice by revealing the complex and paradoxical moderating role of interfirm guanxi.