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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Oct 31, 2015

The Effectiveness of Contractual and Trust-Based Governance in Strategic Alliances under Behavioral and Environmental Uncertainty


We examine the interplay of behavioral and environmental uncertainty in shaping the effectiveness of two key governance mechanisms used by strategic alliances: contractual and trust-based governance. We develop and test hypotheses, using a meta-analytic dataset encompassing over 15,000 strategic alliances across 82 independent samples. We find that contractual governance works best under low to moderate levels of behavioral uncertainty and moderate to high levels of environmental uncertainty, while it is detrimental to alliance performance when both types of uncertainty are low or high. Trust-based governance is most effective at high levels of behavioral uncertainty and low levels of environmental uncertainty. It suffers a large loss of usefulness at high behavioral uncertainty as environmental uncertainty increases. Strategic alliances allow firms to gain greater efficiency and create value. Yet, many such alliances fail because they are not able to deal with the twin challenges posed by behavioral and environmental uncertainty. Findings from our meta-analysis imply that under conditions of high behavioral uncertainty and low-to-moderate levels of environmental uncertainty, the use of trust-based governance alongside contractual governance might enhance the latter’s effectiveness. The combined effectiveness of contractual and trust-based governance under high levels of both behavioral and environmental uncertainty is not obvious. When both behavioral and environmental uncertainty are high, contractual governance hurts alliance performance while trust-based governance does not function at its best either. Under these conditions, it might be better for firms to turn to hierarchy or vertical integration.

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