CONTACTS AND CONTRACTS: DYADIC EMBEDDEDNESS AND THE CONTRACTUAL BEHAVIOR OF FIRMS

Abstract

This chapter addresses social embeddedness effects on ex ante management of economic transactions. We focus on dyadic embeddedness, that is the history of prior transactions between business partners and the anticipation of future transactions. Ex ante management through, for example, contractual arrangements is costly but mitigates risks associated with the transaction, such as risks from strategic and opportunistic behavior. Dyadic embeddedness can reduce such risks and, hence, the need for ex ante management by, for instance, making reciprocity and conditional cooperation feasible. The chapter presents a novel theoretical model generating dyadic embeddedness effects, together with effects of transaction characteristics and management costs. We stress the interaction of the history of prior transactions and expectations of future business. Hypotheses are tested using new and primary data from an extensive survey of more than 900 purchases of information technology (IT) products (hard- and software) by almost 800 small- and medium-sized enterprises (SMEs). Results support, in particular, the hypotheses on effects of dyadic embeddedness.

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