Effectiveness of contracts in marketing exchange relationships: A meta-analytic review

Highlights

• Extant research reports contradictory findings on the efficacy of contracts. The objective of our research is to provide a quantitative review of contract specificity and utilization in business-to-business marketing.

• We find that both contract specificity and utilization yield positive outcomes in general (e.g., higher performance and relationship quality).

• One exception is the positive relationship between contract utilization and opportunism.

• Theoretical (e.g., specific investments, product complexity, and relationship length) and contextual factors (e.g., product type, market type, and study location) moderate influences of contractual properties on exchange outomes.

Abstract

Exchange partners devise and implement contracts to improve performance within a relationship. Detailed, specific contracts provide a blueprint designed to guide desired interfirm behavior, and firms may use the contract to resolve disputes and to ensure the partner fulfills its obligations. Extant research, however, reports contradictory findings on the efficacy of contracts. The objective of our research is to provide a quantitative review of contract specificity and utilization in business-to-business marketing. The findings suggest that specificity and utilization enhance economic performance, relationship quality, and relational norms. Contract specificity is found to discourage opportunism, whereas contract utilization exacerbates opportunism. Theoretical (specific investments, product complexity, and relationship length) and contextual factors (product type, market type, and study location) moderate influences of contractual properties on exchange outcomes. Discussion of these results addresses the implications of the meta-analysis for marketing theory and practice.

Introduction

Contracting is ubiquitous to the flow of resources through supply chains. Contracts represent promises or obligations to perform particular actions and are legally enforceable in the event that a party fails to perform in conjunction with the specifications of the agreement (Kronman, 1985; Poppo & Zenger, 2002). By stipulating the roles and responsibilities of each party, a detailed contract can coordinate action, mitigate conflict, and ensure mutual gains (Griffin & Zhao, 2015; Williamson, 2002). And if a partner's performance veers off course, firms may utilize the contract to resolve disputes and to ensure the partner fulfills its obligations (Samaha, Palmatier, & Dant, 2011).

Despite the importance of contracting and the vast attention paid to it in marketing channels research, several issues remain unresolved. First, extant research on contracting provides mix results. Although some empirical studies support that contracts constrain opportunism and yield higher levels of performance (e.g., Griffin & Zhao, 2015; Kashyap, Antia, & Frazier, 2012), other research suggests otherwise. For example, Jap and Ganesan (2000) report that contracts are related negatively to performance, while Lusch and Brown (1996) find that contracts have no impact on performance. Also, the number of studies that show a positive relationship between contracts and opportunism (e.g., Parkhe, 1993) is almost as many as those that report a negative relationship (e.g., Luo, 2007). These mixed results suggest that contracts may have some unintended consequences, such as perfunctory execution of role behaviors (i.e., performance to the letter of the contract) (Macaulay, 1963), the inability to adapt to unanticipated changes (Griffin & Zhao, 2015), and mistrust (Yang, Zhou, & Jiang, 2011).

Second, both scholars and practitioners often use two different dimensions—contract specificity and contract utilization—to characterize explicit contracts, yet theoretical arguments in extant research often muddle the two together. Specificity refers to the level of explicitness and precision of a contractual agreement (Griffin & Zhao, 2015). It describes the extent to which relevant clauses are clearly specified and codified in a contract (Kashyap et al., 2012). By contrast, utilization refers to the frequency of reference to the contract in the management of the relationship (Samaha et al., 2011). Specificity and utilization are not only conceptually distinct, they are fundamentally different in practice. Specificity is an ex ante governance strategy where exchange parties explicitly outline expected behaviors before engaging in a transaction (Huo, Ye, & Zhao, 2015). Utilization is an ex post governance strategy where exchange parties correct and sometimes penalize unexpected behaviors that occur during the transaction (Antia & Frazier, 2001). In short, specificity serves more as a coordination function, while utilization serves as a control function (Huo et al., 2015).

We draw on relational contracting theory (Macneil, 1978) and transaction cost economics (TCE) (Williamson, 1985) to develop arguments for the differential effects of specificity and utilization on economic and relational outcomes. Both theories underscore the importance of coordination in channel relationships but they emphasize contrasting mechanisms to secure control. From a coordination standpoint, both theories suggest that specific, detailed contracts align expectations to reduce unexpected behaviors (Poppo & Zenger, 2002; Rindfleisch & Heide, 1997). From a control perspective, TCE logic suggests that contract utilization constrains opportunism (Wathne & Heide, 2000) by increasing the marginal cost of guileful behaviors (Frey, 1993), whereas relational contracting theory views utilization as a violation of trust, which may provoke opportunism (Samaha et al., 2011). While these prevailing theories suggest differential effects of utilization on organizational outcomes, prior reviews have not examined this distinction.

Lastly, when delving deeper into the different dimensions of contracts, we find that there are inconsistent findings across studies on contract specificity and economical and relational outcomes, as well as across studies on contract utilization and outcomes. These inconsistent findings provide little guidance to practitioners on the effective design and utilization of contracts. It is unclear as to whether the costs of design and enforcement outweigh the benefits. To shed light on the contexts in which more specific contracts and utilization of contracts yield better outcomes, we examine theoretical and contextual factors as potential moderators.

In sum, the goal of this study is to answer the following questions using meta-analytic techniques: (1) Do contracts generate positive outcomes? (2) What are the influences of contract specificity and utilization on organizational outcomes? (3) What theoretical and contextual factors influence the effectiveness of contract specificity and utilization? By answering these questions, we strive to provide an empirical summary of the contracting literature, resolve conflicting findings, and shed light on effective contract strategy. We also note that our empirical summary of contract utilization is the first in the literature. We begin our analysis by defining and differentiating contract specificity and utilization. Then, we outline the theoretical foundations of our study and present methodological correlates of specificity and utilization. We subsequently present the research method and results. We conclude with a discussion of the implications of our findings and future research directions.