Legal and social safeguards against opportunism in exchange

Abstract

A considerable literature in marketing, economics, and law has emphasized the organizational structures and governance approaches employed by participants to enhance their exchange relationships and safeguard against the hazards of opportunism. The age-old mechanism of protecting against opportunism is the legal contract. Various literatures have attacked the inadequacies of contract in the context of complex, modern day exchange relationships. Some theorists have argued for the superiority of social mechanisms of control while others have been skeptical towards their use. This paper proposes that both legal contracts and social safeguards are useful means of mitigating opportunism. However, they rarely occur in isolation in modern exchanges and the interesting questions about their governance properties have to do with their interaction effects. This article employs a behavioral simulation to empirically examine the individual and combined effects of contract and relational norm safeguards against opportunism directly and in the context of asymmetric commitments by exchanging parties.