How Inter-firm Co-operation Depends on Social Embeddedness: A Vignette Study

Abstract

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, namely, repeated exchange between the partners (temporal embeddedness), relations with third parties such as other firms (network embeddedness) and social institutions that allow for credible agreements and commitments (institutional embeddedness). Together with transaction characteristics, social embeddedness shapes trust problems in economic exchange and how firms mitigate such trust problems through contractual planning. More precisely, we analyse how transaction characteristics and social embeddedness affect effort invested in contractual planning. We argue that social embeddedness provides alternatives for costly contractual planning, such as reciprocity and conditional co-operation. Forty purchase managers participated in a factorial survey. Virtual transactions were presented. Each transaction was represented 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 social embeddedness: the history of previous transactions between the partners, expected future transactions, voice and exit networks and a rough indicator of institutional embeddedness. The purchase managers had to judge how much time negotiations would take, and also how many departments would be involved. Results show that social embeddedness leads a purchase manager to put less effort into the management of the transaction. While one-sided specific investments. monitoring problems and the volume of a transaction induce more negotiation efforts, such efforts decrease if transactions are embedded 'better' in a temporal or network sense, or if buyer and supplier can rely on more institutional embeddedness.