Exchange Hazards Research Articles

Real Options in International Joint Ventures

This article empirically investigates the determinants of firms’ use of explicit call options to acquire equity in their international joint ventures (IJVs). Such options are an important contractual element of IJVs because they allow a firm to secure a claim on future expansion opportunities and to safeguard itself against various exchange hazards. The authors therefore draw on real options and transaction cost arguments, respectively, to develop hypotheses on the circumstances under which firms use such options. The article underscores the importance of studying the design of alliances in finer grained terms and helps refine the application of real options theory in the alliance context.

The influence of governance equilibrium on ERP project success

As the ERP adopter and ERP consultancy combine their efforts and resources to achieve mutually desirable goals, the problem of governance, which has been mainly identified as an intrafirm problem, is recognized to be an interfirm problem. To investigate the relationship between various governance mechanisms and their capacity to relieve project hazards, we propose a covariance model of ERP governance. The constructed model analyzes the complementary contributions of different governance mechanisms on ERP project success. Four governance mechanisms are studied, including explicit contracts, implicit contracts, reputation, and trust. This study holds that the virtue of one mechanism will grow into the gap of another, forming an equilibrium of governance structure. Then, the governance equilibrium plays a mediating role between ERP project hazards and ERP project success. Empirical analysis based on 122 ERP implementation projects shows a significantly positive relationship between governance equilibrium and ERP project success. Further, in support of transaction cost theory (TCT), the results indicate that governance equilibrium tends to be aligned with exchange hazards, specifically those associated with specialized investments and uncertainty. The empirical evidence suggests that governance equilibrium, when treated as a multidimensional construct, can provide a holistic representation of complex interfirm governance and allow researchers to match broad predictors with broad outcomes, leading to greater explanatory power of governance mechanisms on ERP project success. Implications, limitations, and future research directions of the study are discussed.

Moving Out of Committed Relationships

When there are constantly new, valuable opportunities to transact with alternative partners — a situation we refer to as exchange value uncertainty — long-term or committed transactions among the same individuals are discouraged. But when opportunism creates exchange hazards, which escalate in non-recurring transactions, individuals will be reluctant to take full advantage of the gains from switching to more valuable partners, thereby leading to overembedded exchanges. Two mechanisms may encourage movement out of committed relationships in those conditions. First, formal contracts should serve as a safeguard to market participants, in the sense that they limit potential losses due to opportunistic behavior. Second, trust in general others (as opposed to trust in familiar people) reduces participants' perception of hazards in market exchanges and hence promotes transactions among strangers. By increasing the propensity to initiate new exchanges, general trust also diminishes the role of contracts in causing movement out of committed relationships. In this paper, we present experimental evidence largely consistent with this theory of the interplay between formal and informal mechanisms in the determination of social mobility.

Substitutes or Complements? Exploring the Relationship between Formal Contracts and Relational Governance

Transaction cost economics advocates that greater exchange hazards be met either with more tightly crafted contracts or, when the costs of crafting and enforcing complex contracts are sufficiently high, with vertical integration. However, many argue that transaction cost economics vastly overstates the need for either integration or contractual safeguards in exchange settings commonly labeled as hazardous. In many industries, firms engage in complex, collaborative exchanges that involve rather high levels of asset specificity and are characterized by other known hazards, yet are managed without vertical integration and with limited formal contracts. These relational exchange arrangements supported by trust are viewed as substitutes for complex contracts or vertical integration. Others argue that formal contracts may in fact undermine trust and thereby encourage, rather than discourage, opportunistic behavior. In this paper, we develop and test an alternative perspective - that formal contracts and relational governance function as complements. Using data from a sample of information service exchanges, we find empirical support for this complementary position. Managers appear to accompany their increasingly customized contracts with increased levels of relational governance (and visa versa). Moreover, this interdependence underlies their ability to generate improvements in exchange performance. Implications as well as related hypotheses regarding the determinants of relational governance and contracts are also explored.