The effectiveness of contracts is bounded by the institutional environment in which they are designed and enforced. When firms form supply chain partnerships in emerging markets, they may experience contract ineffectiveness, which is defined as a firm's perceived limits of contracts with respect to safeguarding interests and coordinating activities. Specifically, we identify two institutional factors that may give rise to contract ineffectiveness, information transparency and legal enforceability, as they determine how effectively a firm designs and enforces a contract. In addition, we reveal that contract ineffectiveness prompts a firm to seek social ties, including business ties and political ties, to overcome the institutionally induced limits of contracts. These efforts, however, are moderated by the type of predominant pressure a firm bears. While equity pressure strengthens the relationship between contract ineffectiveness and a firm's pursuit of social ties, efficiency pressure weakens this relationship, because seeking social ties imposes an extra burden of efficiency. Tested by data collected from 187 distributors in China, our study reveals the institutional causes and the consequences of contract ineffectiveness, which is a common problem encountered by firms when forming supply chain partnerships in emerging markets.
This work introduces the concept of contract ambiguity from the law literature into the interorganizational governance literature. Within the context of franchising, the authors present a three-study multimethod design empirically establishing the construct of contract ambiguity of franchisor obligations, providing new insights into the strategic design of contracts and their outcomes. In Study 1, the authors establish construct validity by demonstrating that contract ambiguity of franchisor obligations is distinct from contract specificity and contract completeness of franchisor obligations, with differential outcomes. In Studies 2 and 3, the authors demonstrate that contract ambiguity of franchisor obligations increases an interest-based (vs. a rights-based) conflict solving approach, implying greater cooperation and joint problem solving, and reduces franchisee-initiated litigation. The findings also indicate that while contract ambiguity of franchisor obligations decreases franchisee-initiated litigation, this effect is amplified by higher levels of franchisor training programs but mitigated by the presence of a franchisee association. The article closes with a discussion of implications for academics and practitioners.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.