Enhancing Cooperation in Interfirm Relationships: The Role of Reputation and (In)Formal Agreements

Abstract

In this paper, we use a large database of more than 3,700 strategic relationships in force between French firms in 2003 to study the way they govern their relationships combining both relational and formal elements. We argue that these two dimensions might be complements or substitutes depending on the characteristics of the relationships as well as the reputations of contracting partners. More precisely, we posit that the formal dimension of the relationship might help to equilibrate hazards between partners increasing cooperation as well as the reputations of the contracting parties acting as hostages. Our empirical results confirm our predictions and thus suggest that competing theoretical frameworks focusing on informal or formal agreements might not tell the entire story. Our results, by showing how those dimensions might complete or be a substitute for each other, shed new light on previous empirical works on this issue.