Reassembling the Governance System: A Longitudinal Study of Monitoring, Micro-Level Social Contracts, and Opportunism

A considerable body of research in marketing has drawn on the 'New Institutional Economics' paradigm including transaction cost theory. The general focus of this body of research has been on the deployment of so-called governance mechanisms that can reduce the risk of opportunism in relationships. Interestingly, while there exists empirical support for the 'disciplinary' effect of firms' governance choices, there is also evidence which suggests a different scenario. For instance, studies have shown that the governance mechanism of monitoring also has the potential to promote opportunism, due to 'reactance' types of effects. In this study, we attempt to reconcile these discrepancies in the literature by positing that the actual effect of a particular governance mechanism depends not only on the mechanism itself, but also on a broader constellation of governance features. Specifically, we propose that the ability of monitoring to suppress opportunism depends crucially on the presence of a micro-level social contract between exchange partners, which legitimizes a 'principal's' monitoring effect and prevents reactance effects on the part of the 'agent'. A longitudinal study of organizational buyer-supplier relationships shows good support for our predictions. We develop implications for theory, practice, and for empirical testing of organizational theories in marketing.