The Influence of Control Mechanisms and Uncertainty on Partner Selection and Cooperation

This study investigates whether the use of two different control mechanisms (authority mechanisms and reward schemes) and different types of uncertainty (firm specific versus market uncertainty) have an impact on partner selection decisions and on cooperation. First, I hypothesize that a reward scheme is a better control mechanism to establish cooperation than an authority mechanism and as a result we expect that rewards are better suited to support a selection strategy with a limited number of cooperative suppliers. Second, we expect that under firm-specific uncertainty compared to market uncertainty, a selection strategy with multiple, loosely coupled suppliers is preferred because it allows diversification of the performance risk associated with uncertainty. Third, as a result, with firm-specific uncertainty, we expect that an authority mechanism is a more profitable control mechanism while with market specific uncertainty, we expect rewards to be more profitable.

I run a 2 (control mechanism) by 2 (uncertainty) experiment where four buyers can propose contracts to four suppliers who decide whether to accept the contract and how much quality they are willing to provide. The results support the idea that a reward scheme leads to more cooperation than an authority mechanism but cooperation is not strong enough to be more profitable. Only with the authority mechanism, I find evidence that buyers rely on a more diversified set of suppliers with firm-specific uncertainty than with market uncertainty. The experiment also shows that with an authority mechanism, buyers propose more quality-demanding contracts with market uncertainty than with firm-specific uncertainty. With respect to the third prediction, I find that only with firm-specific uncertainty, an authority mechanism yields higher profits with more contracts than rewards.