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Structuring partnerships to facilitate long-term, productive relationships is a central concern of researchers in strategy, marketing, law, and economics (Dyer, 1997; Heide and John, 1990; Macneil, 1978; Williamson, 1985, 1991). According to a number of researchers, "the most challenging aspect of developing and maintaining long-term exchange relationships" (Crocker and Masten, 1991: 70) is how to develop efficient (i.e., least costly) contracts to effectively govern exchange (Macneil, 1978; Williamson, 1985, 1991). Formal contracts enable parties in an exchange to coordinate their actions and limit potential opportunistic behaviors (Dahlstrom and Nygaard, 1999; Goldberg and Erickson, 1987). Yet the initial drafting and subsequent maintenance of these contracts can be costly. Depending on the type of contract used, these "transaction costs" can include both the ex ante costs of initially establishing the contract, and the ex post costs of periodically renegotiating and adjusting existing contracts (Crocker and Masten, 1991; Williamson, 1985). A critical question to be answered then is "How do transactors manage the process of contract selection and maintenance?" Indeed, while the factors influencing the type of contract chosen and the ensuing costs associated with this choice are seen as critically important to the long-term viability of an exchange, very few empirical studies have examined actual contracting practices and their performance implications.
This article seeks to address this shortcoming in the literature by investigating the process of contract selection and the performance implications related to how those contracts are managed. By doing so, we seek to provide valuable insights into the contracting process that may allow firms to realize the potential gains from their exchange relationship (Williamson, 1996). In addition to the aforementioned contribution, we also seek to directly investigate the costs of contracting. While theoretical predictions provide valuable insights into the nature of contracting, empirical investigation is necessary to evaluate the normative implications of those theories (Dyer, 1997; Williamson, 1996). However, most previous studies have failed to conduct this empirical examination of the cost of transacting.
This study seeks to address this gap in the literature. By doing so, we respond to calls for research that directly measures transaction costs (Rindfleisch and Heide, 1997). It should also be noted that while various types of transaction costs such as negotiating and monitoring costs are incurred during exchanges, we...