The Formation of Buyer–Supplier Relationships: Detailed Contract Drafting and Close Partner Selection

Firms face two strategic decisions when engaging in a new purchase transaction: the decision whether to draft a detailed contract and the decision whether to select a partner with which they share a close tie. The authors study how organizational culture affects these decisions and the effectiveness of these decisions in curtailing the partner's opportunistic behavior. The results suggest that organizational culture exerts an important but different influence on both decisions. Selecting a close partner shows a marked ability to hedge against partner opportunism, but beyond a certain point, it encourages the opportunism it is designed to discourage. Contracting becomes effective only when a nonclose partner is selected and when the focal relationship is embedded in a network of close mutual contacts.