Ex ante governance decisions in inter-organizational relationships: A case study in the airline industry
Introduction
Previous research discusses opportunism as a serious management problem with practical implications for inter-organizational relationships (IORs, e.g. Brown et al., 2000, Oxley, 1997, Stump and Heide, 1996, Wathne and Heide, 2000). If there is a (potential) risk of opportunism in an IOR, significant resources must be invested in the ex ante governance design, because opportunistic behavior is “individually rational yet produces a collectively suboptimal outcome” (Parkhe, 1993, p. 794). Consequently, ex ante governance decisions are of considerable importance in successful IOR management (e.g. Dekker, 2004, Ittner et al., 1999, Kumar and Seth, 1998, Van der Meer-Kooistra and Vosselman, 2000). When considering such decisions in IORs, two main ex ante approaches can be identified: (1) selecting the “right” partner (particularly with regard to trust) and (2) safeguarding the relationship through a sound formal governance structure (e.g. Celly and Frazier, 1996, Das and Teng, 1998, Dekker, 2004, Emsley and Kidon, 2007, Ireland et al., 2002, Van der Meer-Kooistra and Vosselman, 2000). Such structures define contractual responsibilities and formal organizational mechanisms frequently divided into behavior and outcome control mechanisms, whereby the behavior or outcome is pre-specified and monitored ex post (Ouchi, 1979). Yet, when considering potential opportunism in IORs as a governance issue, recent literature has focused primarily on the hold-up problem encountered in transaction cost economics (TCE, e.g. Dekker, 2004, Langfield-Smith and Smith, 2003, Oxley, 1997). In doing so, it analyzes how appropriation concerns regarding specific investments can serve to explain ex ante governance decisions.
This article's contribution to existing research is twofold: it offers a comprehensive explanation of the complex phenomenon of opportunism in ex ante governance decisions and, at the same time, it takes asymmetric bargaining power into account in such decisions.
When defining opportunism, Williamson (1985, p. 47) states: “By opportunism I mean self-interest seeking with guile. This includes but is scarcely limited to more blatant forms, such as lying, stealing and cheating. Opportunism more often involves subtle forms of deceit. […]. More generally, opportunism refers to the incomplete or distorted disclosure of information, especially to calculated efforts to mislead, distort, obfuscate, or otherwise confuse.” By this definition, opportunistic behavior includes various kinds of ex ante deliberate misrepresentation at the initiation stage and various forms of (active or passive) ex post violation of formal contracts and/or exploitation of vulnerabilities when the IOR is in place (Wathne and Heide, 2000, p. 39). Appropriating the quasi rents from specific investments described in the hold-up problem is one example of opportunism. Another is the deliberate misrepresentation of a firm's true attributes prior to the signing of a contract, i.e. pre contract hidden information (Arrow, 1985). A further example is the ex post shirking on quality/effort or information known as hidden action and ex post hidden information (Holmström, 1982). These kinds of behavior often come together. However, shirking on action and/or information can also be a rational strategy without either partner making substantial specific investments (Barney and Hesterly, 1996). Thus, although these kinds of opportunism might not always be interpreted as distinct manifestations of opportunistic behavior, this can vary and different governance mechanisms are needed to safeguard the IOR. Consequently, this article examines opportunistic behavior with relation to hold-up, hidden action and hidden information situations in IORs (see e.g. Bai et al., 2004, Barney and Hesterly, 1996) and provides examples of the unique ex ante governance modes required to safeguard such relationships. It also distinguishes between ex ante governance decisions and their anticipated ex post effects (Puranam and Vanneste, 2009, Williamson, 1985, Williamson, 1991a), in particular the development of ex post trust and relational governance mechanisms.
This article also contributes to research by taking asymmetric bargaining power into account in ex ante governance decisions. This is particularly important given the central role accorded to opportunism in power theories (Barney and Hesterly, 1996). Although literature considers bargaining power to be a control issue in IORs, few studies actually analyze it in an IOR governance context (see recently e.g. Donanda and Nogatchewsky, 2006). The literature does, however, indicate different factors that affect bargaining power, i.e. the level of dependency on the relationship or its outcome, the availability of alternatives, and the possession or control of critical resources (Yan and Gray, 1994).
There are numerous, even conflicting, predictions regarding bargaining power and control. Approaches here include: a focus on the dependency that results from asymmetric specific investments (Donanda and Nogatchewsky, 2006), a straightforward relationship between power and control (Yan and Gray, 1994) or the use of bargaining power itself as a governance device alongside trust and formal safeguards (Alvarez et al., 2003). One question appears to have not yet been addressed in any depth in the available literature, namely how a dominant partner applies its bargaining power in ex ante governance decisions when trust is a key issue.
In short, this paper seeks firstly to explain how ex ante governance decisions in IORs can be reasoned by deconstructing opportunism and considering their ex post impact on the development of trust and relational mechanisms. It then describes how asymmetric bargaining power can influence these decisions paying particular attention to how the dominant partner applies its bargaining power to create and promote a relationship of trust. For this purpose, the paper develops a framework for ex ante governance decisions in IORs which deconstructs opportunism, incorporates the distinct formal governance mechanisms and partner selection, examines the ex post effects of such decisions on trust and relational governance mechanisms and discusses the impact of asymmetric bargaining power.
The explanatory power of this framework is then empirically assessed using an IOR between two European airlines. Numerous authors emphasize that opportunism is a crucial problem, particularly when competitors enter into an IOR (e.g. Bucklin and Sengupta, 1993, Park and Russo, 1996). These particular airlines are competitors and are also very different in terms of size and market power, thus raising the risk of opportunism and creating asymmetric bargaining power. Consequently, this case study offers a suitable empirical base for assessing the theoretical insights (Siggelkow, 2007) and permits an in-depth analysis of the data (the main advantage of case-based research; see Eisenhardt and Graebner, 2007).
The following section elaborates the theoretical framework, Section 3 presents the case study, while Section 4 provides conclusions and implications for further research.
Section snippets
Deconstructing opportunism in IORs
Transaction cost economics provides the basis for research into opportunism and governance decisions in IORs. In TCE terminology, transaction-specific investments in a world of incomplete contracts generate the safeguarding problem known as the hold-up problem (Williamson, 1985). Specific investments have less value outside a specific transaction than they do have in it. This difference is referred to as quasi rent. In an IOR context, examples of such investments might be the development of
Research design and methodology
This case study illustrates a bilateral IOR between two European airlines. The empirical data for the case study was gathered primarily through oral interviews and from written documents. There was also a considerable amount of less formal communication (e-mail, telephone and meetings) with some representatives of the firms. All data was collected between May 2005 and May 2006. The research began with preliminary meetings at company A, which provided background information on the companies, the
Conclusion and implications
By taking an explanatory approach to the ex ante governance decisions in an IOR between two airlines, this article contributes to the debate on IOR governance design. The results indicate that important insights into governance decisions and, thus, into the relationship between formal safeguarding mechanisms and trust, are gained by taking different kinds of opportunistic behavior, asymmetric bargaining power and the ex post effects of ex ante governance decisions simultaneously into account,
Acknowledgements
I gratefully appreciate the efforts of the Editor in Chief, Robert W. Scapens, and two anonymous reviewers in helping me develop this work and for their guidance and encouragement throughout the review process. I also thank the participants at the two case companies for their generous provision of time and data, particularly my main contact at company A, who actively and continuously supported this research from start to finish.
References (76)
- et al.
Managing the tensions in integrating global organisations: the role of performance management systems
Manage. Acc. Res.
(2008) Management control systems design within its organizational context: findings from contingency-based research and directions for the future
Account. Org. Soc.
(2003)Control of inter-organizational relationships: evidence on appropriation concerns and coordination requirements
Account. Org. Soc.
(2004)- et al.
Alliance management as a source of competitive advantage
J. Manage.
(2002) - et al.
Supplier selection, monitoring practices, and firm performance
J. Account. Publ. Policy
(1999) - et al.
Theory of the firm: managerial behavior, agency costs and ownership structure
J. Finan. Econ.
(1976) - et al.
Management control patterns in joint venture relationships: a model and exploratory study
Account. Org. Soc.
(2007) - et al.
Management control systems and trust in outsourcing relationships
Manage. Account. Res.
(2003) - et al.
Corporatisation and accounting change: the role of accounting and accountants in a Malaysian public utility
Manage. Account. Res.
(2007) - et al.
Case study research in management accounting and control
Manage. Account. Res.
(1994)
Researching management accounting practice: the role of case study methods
Br. Account. Rev.
Interdependencies, trust and information in relationships, alliances and networks
Account. Org. Soc.
Management control of interfirm transactional relationships: the case of industrial renovation and maintenance
Account. Org. Soc.
Accounting for control and trust building in interfirm transactional relationships
Account. Org. Soc.
The market for “lemons”: qualitative uncertainty and the market mechanism
Quart. J. Econ.
Production, information costs, and economic organization
Am. Econ. Rev.
The firm is dead; long live the firm: a review on Oliver E. Williamson's The economic institutions of capitalism
J. Econ. Lit.
Trust and its alternatives
Hum. Res. Manage.
The economics of agency
Trust, power and control in trans-organizational relations
Org. Stud.
Bargaining: Power, Tactics, and Outcomes
Revenue sharing and control rights in team production: theories and evidence from joint ventures
Rand J. Econ.
Subjective performance measures in optimal incentive contracts
Quart. J. Econ.
Relational contracts and the theory of the firm
Quart. J. Econ.
Organizational economics: understanding the relationship between organizations and economic analysis
Measurement costs and the organization of markets
J. Law Econ.
Managing marketing channel opportunism: the efficacy of alternative governance mechanisms
J. Market.
Agency relationships on marketing: a review of the implications and applications of agency theory and related theories
J. Market.
Organizing successful co-marketing alliances
J. Market.
Outcome-based and behavior-based coordination efforts in channel relationships
J. Market. Res.
The contractual nature of the firm
J. Law Econ.
Between trust and control: developing confidence in partner cooperation in alliances
Acad. Manage. Rev.
Vassal or lord buyers: how to exert management control in asymmetric interfirm transactional relationships?
Manage. Acc. Res.
The relationship between trust and control in international joint ventures: evidence from the airline industry
Contemp. Acc. Res.
Agency theory: an assessment and review
Acad. Manage. Rev.
Theory building from cases: opportunities and challenges
Acad. Manage. J.
Bad for practice: a critique of the transaction cost theory
Acad. Manage. Rev.
Does familiarity breed trust? The implication of repeated ties for contractual choice in alliances
Acad. Manage. J.
Cited by (25)
How multi-sourcing can influence management control: Case study evidence from the electronic products supply chain
2022, British Accounting ReviewCitation Excerpt :The supply chain management literature often considers trust-based patterns of control, such as informal socialization (Cousins & Menguc, 2006) and social contracts (Heide et al., 2007), as a psychological state and not a control choice.3 We examine multi-sourcing and formal controls as our research focuses on buyer-supplier relationships in the execution phase (Dekker, 2004; Häkansson & Lind, 2004; Langfield-Smith & Smith, 2003; Li, Poppo, & Zhou, 2010; Li, Xie et al., 2010; Neumann, 2010). We draw from studies of manufacturers’ competitive priorities to define outcome-focused control as cost management activities that target reductions in supplier costs and behavior-focused control as performance management activities that support continuous improvement (e.g., Cooper & Slagmulder, 2004; Seal et al., 2004).
Beyond the decision to ally: Constraints on adapting to emergent control risks
2021, Management Accounting ResearchCitation Excerpt :To use a simple mode of governance to manage a complex transaction would be to risk contractual breakdown, whereas to use a complex mode of governance to manage a simple transaction would be to incur additional costs without significant gain. To date, most inter-firm control research has used TCE to investigate how alliance controls align to the ex-ante properties of the exchange, including the transaction, parties, or environment (e.g., Anderson and Dekker, 2005; Anderson et al., 2000; Dekker, 2004, 2008; Dekker and Van den Abbeele, 2010; Ding et al., 2013; Donada and Nogatchewsky, 2006; Langfield-Smith and Smith, 2003; Neumann, 2010). These properties, such as the specificity of partners’ investments or the length of their previous collaborations, are theorised to influence the propensity for future hazards, and as a consequence, the partners’ initial choice of the alliance controls (Speklé, 2001; Van der Meer-Kooistra and Vosselman, 2000).3
Forming mixed-type inter-organisational relationships in Sub-Saharan Africa: The role of institutional logics, social identities and institutionally embedded agency
2021, Critical Perspectives on AccountingCitation Excerpt :As such, we show how the institutional environments of countries in Sub-Saharan Africa can impede the implementation of NPM practices, such as ex-ante IOMCs (cf. Ashraf & Uddin, 2011; Hopper et al., 2012). In addition, our findings suggest that the problems encountered in mixed-typed IORs in Sub-Saharan Africa are just as likely to be due to their institutional environments, as to the lack of appropriate ex-ante IOMCs, especially in the partner selection process, which have been found to be particularly important for successful IORs in developed countries (cf. Dekker, 2008; Ding et al., 2013; Neumann, 2010). Despite the development of a private sector logic in PenFund, elements of the societal-level logics, such as kinship and political connections, underpin the social identities of the organisational actors and shape their institutionally embedded agency.
Relational contracting and the myth of trust: Control in a co-opetitive setting
2017, Management Accounting ResearchCitation Excerpt :It is this understanding that develops between close partners that enables them to make informal agreements; relabelling this as ‘trust’ does not enhance knowledge of relational contracting (Williamson, 1993). The different bodies of literature do agree, however, that relational contracting is an important means to supress opportunistic behaviour in inter-firm contexts, promoting co-operation in the absence of an enforceable contract (Neumann, 2010; Gil, 2009; Poppo and Zenger, 2002; Windolph and Moeller, 2012). Firms self-regulate because opportunistic behaviour is itself highly risky and can impact the continuation of the exchange relationship.
On the boundaries between intrafirm and interfirm management accounting research
2016, Management Accounting ResearchDeals and value measuring in interactive health-care services
2023, Journal of Business and Industrial Marketing