The Interplay of Relational Governance and Formal Control in Horizontal Alliances: A Social Contract Perspective

Abstract

Governance is critical to an alliance relationship as it aids in curbing opportunism and thus in achieving higher performance. While research suggests relational governance as well as formal control mechanisms as viable means to reduce opportunistic behavior in an alliance relationship, the effectiveness of the interplay of these governance forms remains an important issue. This research addresses this challenge by applying social contract theory to resolve the uncertainties surrounding whether relational governance, exercised by joint actions in the performance measurement process (PMP), can be effectively complemented by the formal control mechanisms of output and process controls. Based on a survey of 197 horizontal alliances of German logistics service providers and using structural equation modeling, we find that if formal control mechanisms are legitimized by underlying agreements, which are established through relational governance (i.e., joint actions), the two governance forms indeed complement each other. However, if no such legitimization through social contracts is present, the complementation is counterproductive. Furthermore, it is shown that opportunism in the setting of horizontal alliances is also detrimental to alliance success.

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