Relationship between governance mechanisms and contract performance

Abstract

PurposeThe purpose of this paper is to explain the variation in the relationship between governance mechanisms and the effect of the relationship on contract performance, especially in controlling partner opportunism.Design/methodology/approachThis study conducts a comparative case analysis of contract governance of “National Health Insurance Program” in India. The data are collected using field research through in-depth interviews and direct observation across three states in India.FindingsThe authors find that the governance mechanisms continue to complement and substitute, both in a dynamic manner, but until aligned with the nature of transaction, they are ineffective to mitigate opportunism, a critical dimension of contract performance. Inappropriate governance mechanisms inflate the gaps in incomplete contracts, resulting in partner opportunism.Research limitations/implicationsThe study draws findings from healthcare context and service-based contracting; therefore, the applicability of this study may vary in other contexts.Practical implicationsThe paper highlights the need for building flexibility in the governance structure while designing contracts. Further, managers need to combine both governance mechanisms dynamically to align with the nature of the transaction to control partner opportunism.Originality/valueThe authors contribute to the existing debate on the conundrum of the relationship between governance mechanisms and provide a new explanation. The authors propose that it is not the specific governance mechanisms but the alignment of the governance mix with the nature of the transaction that determines the contract performance, especially control of partner opportunism.