ACTA SOCIOLOGICA 2000
How Inter-firm Co-operation Depends on Social
Embeddedness: A Vignette Study
Gerrit Rooks, Werner Raub, Robert Selten and Frits Tazelaar
Department of Sociology/ICS, Utrecht University, Utrecht, The Netherlands
ABSTRACT
This paper examines the effects of the social context of economic exchange on the
governance of transactions in buyer–supplier relations between Ž rms. We distinguish
three dimensions of social embeddedness of transactions, namely, repeated exchange
between the partners (temporal embeddedness), relations with third parties such as
other Ž rms (network embeddedness) and social institutions that allow for credible
agreements and commitments (institutional embeddedness). Together with transaction
characteristics, social embeddedness shapes trust problems in economic exchange and
how Ž rms mitigate such trust problems through contractual planning. More precisely,
we analyse how transaction characteristics and social embeddedness affect effort
invested in contractual planning. We argue that social embeddedness provides
alternatives for costly contractual planning, such as reciprocity and conditional
co-operation. Forty purchase managers participated in a factorial survey. Virtual
transactions were presented. Each transaction was represented by a vignette composed
of eight characteristics, the levels of which were varied randomly. Three characteristics
represented ‘economic’ features of transactions, namely, transaction-speciŽ c
investments, monitoring problems and volume of the transaction. Five vignette
characteristics represented social embeddedness: the history of previous transactions
between the partners, expected future transactions, voice and exit networks and a
rough indicator of institutional embeddedness. The purchase managers had to judge
how much time negotiations would take, and also how many departments would be
involved. Results show that social embeddedness leads a purchase manager to put less
effort into the management of the transaction. While one-sided speciŽ c investments,
monitoring problems and the volume of a transaction induce more negotiation efforts,
such efforts decrease if transactions are embedded ‘better’ in a temporal or network
sense, or if buyer and supplier can rely on more institutional embeddedness.
Werner Raub, Department of Sociology/ICS, Utrecht University, Heidelberglaan 1, 3584 CS
Utrecht, The Netherlands
Ó Scandinavian Sociological Association 2000
1. Introduction
The governance of contractual relations
between Ž rms is a classic topic of organization
studies. In his seminal study, Macaulay
(1963:58) observed that Ž rms often avoid
contractual planning: ‘businessmen often prefer
to rely on ‘a man’s word’ in a brief letter, a
handshake, or ‘common honesty and decency’ –
even when the transaction involves exposure to
serious risks.’
It may be assumed that Ž rms are concerned mainly with their own interests. Hence,
why do they trust one another by relying on ‘a
man’s word’, a handshake and ‘common
honesty and decency’ when transactions
involve risks? Why do Ž rms use contractual
planning to such a low degree? Macaulay
124 ACTA SOCIOLOGICA 2000
(1963) suggests alternatives for contracts.
Selecting Ž rms with an established reputation
can diminish risk. Firms can also use extra-legal
sanctions. In many cases, buyers and sellers
have often known each other for a long time.
They help each other by exchanging information about other Ž rms and markets; they send
each other presents and dine together in the
hope of making good deals. Firms usually want
to continue existing relationships, and for this
reason non-co-operative behaviour is avoided.
While Macaulay’s study received much attention (e.g., Ellickson 1991; GrifŽ ths 1996), relatively little quantitative empirical research has
emerged that systematically addresses his intuitive explanations.
Neo-classical economic models assume
that transactions involve negligible costs. This
assumption is relaxed in transaction cost theory
(Williamson 1985). Firms risk being exploited
by other Ž rms. This induces them to incur costs
in the processes of searching for trustworthy
business partners, negotiating, drawing contracts and enforcing contracts (Eggertsson
1990). These transaction costs explain why
markets are not always the most efŽ cient
governance structures. Some transactions are
more efŽ ciently organized in a hierarchy; for
example, ‘making’ is sometimes cheaper than
‘buying’. Hybrid forms, like franchises and
subcontracting, can be identiŽ ed between markets (buying) and hierarchy (making).
Transaction cost theory largely omits the
social context from the explanation of the
organization of transactions (Granovetter
1985; Raub & Weesie 1991, forthcoming;
Gulati 1995; Blumberg 1998). Williamson
acknowledges the signiŽ cance of the social
context of transactions (1994:166): ‘Although
the main predictive of transaction cost economics turns on the attributes of transactions, this is
not to say that context is unimportant’. Raub
and Weesie (1991, forthcoming) propose to
include core features of the social context into a
rational choice model for the ‘management’ of
transactions. The social context can be represented by two types of embeddedness of
transactions, namely structural and institutional
embeddedness. Structural embeddedness refers
to the embeddedness of transactions in social
relations. First, a transaction is often embedded
in a sequence of transactions between the same
Ž rms: transactions are temporally embedded.
Second, transactions are often embedded in
networks of relations between Ž rms. A Ž rm
often knows and has access to other partners of
VOLUME 43
a given business partner and sometimes does
business with these third parties. For example, a
buyer may be in touch with other buyers from
his supplier. Transactions are likewise
embedded in social institutions. Social institutions can be seen as informal (for example,
norms) and formal (for example, laws) rules that
allow for credible agreements and commitments
(North 1990). Embeddedness of transactions
provides Ž rms with extra opportunities for
managing these transactions. For example,
structural embeddedness of transactions
enables conditional co-operation. This is the
possibility of sanctioning co-operative behaviour in today’s transaction positively and
sanctioning unco-operative behaviour negatively in future transactions. By applying
management mechanisms made possible by
the social embeddedness of transactions, Ž rms
are able to organize transactions more efŽ ciently (Weesie et al. 1998). However, systematic empirical research into the effects of social
embeddedness on the management of transactions is scarce.
In this study, we focus on the effects of
social embeddedness on the management of
transactions. We do not focus on the content of
management, but on management effort. In this
study, management effort refers to the total time
spent on negotiating and concluding a contract.
The focus on management effort implies that we
are seeking to explain the amount of transaction cost associated with a transaction instead
of the choice of governance structures for
transactions, the core explanandum of transaction cost theory. From the perspective of the
robustness of our predictions, an advantage of
choosing management effort as our dependent
variable is that we do not need to employ
assumptions on differences in (relative) costs of
different governance structures for deriving
hypotheses (see Batenburg et al. 1999).
We focus on transactions between buyers
and suppliers. These transactions can be considered trust problems (see Dasgupta 1988;
Kreps 1990; Coleman 1990: Chapter 5). In
reality, these trust problems are mostly doublesided: both buyer and seller have incentives for
breaking agreements. The buyer can postpone
payment; the seller can delay delivery or sell a
‘lemon’. Here, we look at transactions from the
perspective of the buyer. For the sake of
simplicity, we assume that the problem of trust
is one-sided: the buyer has to trust the seller.
Buyers can solve the problem by making
contracts as complete as possible, but this is
Inter-firm Co-operation and Social Embeddedness 125
costly and often inefŽ cient. More efŽ cient
solutions to the trust problem are feasible via
the social embeddedness of transactions.
The central question of this study can be
formulated in the following way: What are the
effects of temporal embeddedness, network
embeddedness and institutional embeddedness,
next to ‘economic’ characteristics of a transaction, on management effort? Theory and
hypotheses on management effort are provided
in section 2. To test hypotheses, we conducted a
vignette experiment. Forty buyers judged virtual transactions (vignettes). The exact procedure followed in this experiment is explained in
section 3. Each buyer judged multiple vignettes;
therefore our data are characterized by a nested
structure. This induced us to use the Hierarchical Linear Model to analyse the data. This
model and the results are discussed in section
4. A discussion of the results concludes the
paper.
2. Theory and hypotheses
The performance of a supplier is not always
satisfactory. Possible ex post problems include
delayed deliveries and inferior quality of products. Such problems are the result of opportunism, force majeure or misunderstandings.
Williamson (1985:47) deŽ ned opportunism as
‘self-interest seeking with guile’. He subsumes
blatant forms of lying and cheating under
opportunism, but underlines the importance of
‘soft’ forms (1985:47): ‘Opportunism more
often involves subtle forms of deceit’. A second
source of problems may be force majeure. A seller
is willing to fulŽ l the contract, but is not able to
do so due to unforeseen contingencies. These
can include  uctuations in prices of raw
materials or delayed delivery due to a temporal
shortage in personnel because of a  u epidemic.
Misunderstandings are an additional source of
problems: both buyer and seller intended to cooperate, but did not plan the transaction
properly or suffered from coordination problems.
The management of a transaction aims at
diminishing the likelihood of such problems and
reducing damage should problems arise. Here
we focus on the buyer’s effort involved in the
contractual planning of a transaction. By contractual planning of a transaction, we mean
negotiations and results of negotiations surrounding the following four issues (Macaulay
1963): (1) deŽ ning performance, (2) deŽ ning
duties when unforeseen circumstances arise, (3)
deŽ ning sanctions and (4) planning the enforceability of the agreement. Management effort is
a choice variable. More effort will be invested
when the likelihood that problems will occur, or
that damage will ensue from possible problems,
is high. In addition, the degree of effort put into
management will be determined by the cost of
planning. The optimal amount of management
effort depends on costs and beneŽ ts (Blumberg
1998; Batenburg et al. 1999). Thus, in a sense,
we conceive of contractual planning and trust
as alternative arrangements for transactions.
Contractual planning provides safeguards
against problems such as opportunism, but is
costly. Therefore, trust will be an attractive
substitute for costly contractual planning if the
likelihood of problems or of damage from
problems is small, or if social embeddedness
provides non-contractual safeguards. More
effort invested in contractual planning thus
indicates a ‘lack of trust’ (see also Buskens
1999: Chapter 5). Hence, by analysing effort,
we likewise highlight the behavioural implications of trust.
Based on transaction cost theory, three
transaction characteristics can be identiŽ ed that
in uence the likelihood of problems and the
amount of possible damage. Hence, these
transaction characteristics can be expected to
affect management effort.
Transaction-specific investments
The value of transaction-speciŽ c investments
decreases when they have to be redeployed for
other transactions. An example of such investments is a mould that is used for the production
of components for a certain type of car. A mould
cannot be used for the production of components for other types of cars, and is therefore
highly speciŽ c. If for any reason the buyer of the
components chooses to build a new type of car,
then the seller is left with moulds that have only
scrap value. Because of transaction-speciŽ c
investments, switching to an alternative partner
becomes costly. This explains why Ž rms, when
making such investments, become vulnerable to
opportunism. An example of empirical research
into the effects of transaction-speciŽ c investments on the management of transactions is
Monteverde and Teece (1982). They found that
Ž rms in the automobile industry in the United
States were more inclined to make components
themselves than to procure them from a
supplier if they had to make larger speciŽ c
investments.
126 ACTA SOCIOLOGICA 2000
Hypothesis 1: The larger the transaction-speciŽ c
investments, the more effort will be invested into the
management of the transaction.1
Uncertainty
Uncertainty refers to unforeseen circumstances
that might arise in the course of a transaction,
as well as the fact that one of the partners may
have private information which the other lacks
and which can be used strategically. Monitoring
problems are a special kind of private information. For example, these problems arise when it
is difŽ cult and costly for a potential buyer to
determine the quality of a good or service. Good
examples of monitoring problems are the
questions that arise when buying a second
hand car. How good is the car? How well did the
previous owner look after it? Monitoring problems provide sellers with the possibility and
incentive to behave opportunistically (sell a
‘lemon’). Buyers will know this and, hence,
have an incentive to put more effort into
management.
Hypothesis 2: The greater the uncertainty that
surrounds a transaction, the more effort will be
invested into the management of the transaction.
Volume
Macaulay (1963) observed that important,
unusual transactions are regulated by very
detailed contracts. As an – extreme – example
he mentioned the sale of the Empire State
Building in the early 1960s: more than 100
lawyers produced a contract consisting of 400
pages. Williamson (1985:60) likewise addresses
the volume of a transaction: ‘The cost of
specialized governance structures will be easier
to recover for larger transactions of a recurring
kind’. If problems occur, the damage will be
larger as the volume of a transaction increases.
Therefore, the expected beneŽ ts of management
to prevent the problems increase. In addition,
the need to coordinate activities will be higher.
Therefore, when the volume of a transaction is
greater, buyers have an incentive to put more
effort into management.
Hypothesis 3: The greater the volume of a
transaction, the more effort will be invested into
the management of the transaction.
Embeddedness
In addition to ‘economic’ characteristics, transactions have ‘social’ characteristics. Transactions take place in a social context. The social
context of a transaction can be represented by
VOLUME 43
two types of embeddedness, namely, structural
embeddedness of transactions in social relations
(Granovetter 1985) and the embeddedness of
transactions in institutions (Raub & Weesie
1991, forthcoming; Weesie & Raub 1996).
Structural embeddedness of a transaction refers
to connections between transactions. First,
transactions can be connected by repetition
between two Ž rms, so-called ‘temporal embeddedness’. Second, transactions can be connected
via relations with third parties, so-called ‘network embeddedness’. In this section, we focus
Ž rst on the effects of temporal embeddedness on
management and second on the effects of
network embeddedness on management. We
close the section with the effects of institutional
embeddedness on management.
Temporal embeddedness 2
The shadow of the past.
The shadow of the past refers to the duration,
frequency, volume and success of previous
transactions between buyer and supplier. Systematic (empirical) knowledge about the effects
of the past on the management of transactions
is scarce. Gulati (1995) Ž nds an association
between the number of times two Ž rms have
formed an alliance previously and the type of
contract used for a new alliance between them.
The more previous alliances they have had, the
less likely it is that new contracts will be equitybased, indicating a decreased need to deter
opportunism. We discuss two possible effects of
a shared past on the management of a transaction. First, a buyer can collect information about
the behaviour of a supplier. Lorenz (1988)
considers this Ž rst-hand experience to be the
best indication of trustworthiness. Granovetter
(1985) suggests something similar: Ž rst-hand
information is cheap, reliable, detailed and
accurate. The behaviour of a supplier becomes
more predictable. This means that, given that
the past was successful, a common past reduces
potential problems that may arise because of
opportunism and misunderstandings.
Second, a common past often implies that
mutual speciŽ c investments have been made.
Repeated interactions enable Ž rms to develop a
close co-operative relationship. Palay (1984)
calls this ‘transactional capital’. Before, we
suggested one-sided investments to be a possible
reason for opportunism problems. We do not
expect this to happen when mutual speciŽ c
investments have been made. After all, opportunistic behaviour would lead to a loss in own
‘transaction capital’.
Inter-firm Co-operation and Social Embeddedness 127
Hypothesis 4: The longer and more successful the
past association, the less effort will be invested into
the management of the transaction.
The shadow of the future.
Firms often intend to continue to do business
with each other (see Weber 1976:192–193).
This expectation of future business casts its
shadow on the present management. Expectations of future business accordingly are often
called the ‘shadow of the future’ (Axelrod
1984). Empirical research into the effects of
the ‘shadow of the future’ on the management
of transactions is scarce. Heide and Miner
(1992) report an effect of ‘the shadow of the
future’ (expectations of the frequency and
length of future business) on four co-operation
indicators, namely  exibility, shared problem
solving, information exchange and reluctance
to use power. Parkhe (1993) found a positive
association between the performance of an
alliance and the length of the ‘shadow of the
future’. Expectations of future business create
the possibility of conditional co-operation
(Axelrod 1984), for example, by accepting an
occasional delivery of somewhat lesser quality
from an appreciated supplier. Co-operation can
be positively sanctioned in the future. Opportunistic behaviour, conversely, can be sanctioned
negatively in the future, for example, by not
accepting deliveries of a somewhat lesser
quality, but returning them immediately. In an
extreme situation, a buyer can exit the relationship. Conditional co-operation requires, however, that the future is sufŽ ciently important. If
the long-term costs of opportunism outweigh
the short-term beneŽ ts, then a rational supplier
will not act opportunistically. The co-operationpromoting role of reciprocity was studied
empirically by Kogut (1989). He found that
the more bonds exist between two Ž rms –
multiple bonds create the possibility of reciprocity – the more stable joint ventures are.
In addition to reciprocity effects, expectations of future business can also have an
opposite effect. The management of today’s
transaction is likewise an investment for future
transactions. Tangible examples of such investments are contracts that are used for the
current transaction, but can be re-deployed for
later transactions. Less tangible are investments
for building up a good working relationship and
enlarging ‘transactional capital’. Besides the
incentive to safeguard against possible opportunism in today’s transaction, an incentive
exists to put more effort into the management
of the transaction with an eye on future
transactions. What is invested in the management of the current transaction can be earned
back with proŽ t later if future transactions are
to be expected (see Williamson 1985:60–61 for
a related argument on how ‘frequency’ of
transactions makes ‘specialized governance
structures’ more attractive).
A priori we cannot say what the main effect
of the shadow of the future on the management
of a transaction will be. First, we expect the
shadow of the future to create the possibility of
reciprocity. Because of this possibility, less
management is needed to safeguard transactions. This implies that the effect of the shadow
of the future will be negative. Second, we expect
an investment effect. This implies that more
effort will be put into management, because
investments can be earned back proŽ tably in the
future. So, the investment effect will be positive.
This leaves us with two opposing effects of the
shadow of the future. Without further assumptions, we cannot identify the stronger of the two
effects.
However, we do expect that the effect of the
shadow of the future depends on the degree to
which a shared past exists between buyer and
supplier. To describe this conditional hypothesis,
we distinguish between two situations. We Ž rst
consider the situation where a buyer and
supplier expect to do business in the future,
but have no common past. In the second
situation, the buyer and supplier have a
common past and they expect to keep on
doing business with one another. We focus on
a past that has been successful, assuming that
Ž rms tend to exit from a relation with a partner
who turns out to be incompetent or unreliable
(see below).
The shadow of the future without a common past.
On the one hand, the shadow of the future
implies that the incentive to put effort into
management of a transaction is reduced. Firms
can use conditional co-operation for safeguarding the transactions. On the other hand, the
shadow of the future creates an incentive to
invest in the current transaction and, hence, to
put more effort into management. We cannot
predict the net effect.
The shadow of the future combined with a common
past.
If a common past exists, the feasibility of
conditional co-operation still has an effect on
the management of a transaction. On the other
128 ACTA SOCIOLOGICA 2000
hand, investments have already been made in
earlier transactions, a good working relationship has been developed and contracts have
been written. The incentive to invest in this
situation is less than in a situation where no
past exists. Hence, the investment effect will
decrease. This yields a hypothesis on an
interaction effect between a shared past and
the shadow of the future.
Hypothesis 5: If a shared past exists, the effort
invested into the management of the transaction
will be smaller if the shadow of the future is larger.
Network embeddedness
In this section we consider two types of network
embeddedness by distinguishing the ‘voice’ and
‘exit’ networks (Hirschman 1970; Blumberg
1998).
Voice network.
The buyer’s voice network includes other
partners, for example, other buyers or suppliers
of the supplier, his bank or his lawyer, with
whom the buyer can exchange information
about the supplier. Social networks connect
transactions; they enable Ž rms to collect and
spread information about business partners
(Raub & Weesie 1990; Buskens 1999). This
implies that conditional co-operation is facilitated (Kreps 1990). Co-operation can be sanctioned positively, for example, by recommending
the supplier to other buyers. Also, opportunism
can be sanctioned negatively, for example, by
warning other buyers not to buy from the
supplier. This implies that opportunism becomes
more costly: the (valuable) reputation of a
supplier can be damaged if he behaves opportunistically. Obviously, voice can be used not
only in contacts with other buyers of the
supplier, but also in contacts with his further
business partners, such as his own suppliers, his
bank or his lawyer. Thus, the buyer’s voice
network offers sanction opportunities analogous to the shadow of the future: reciprocity
causes a reputation to become valuable, and so
opportunism becomes less attractive. Reputation effects are possible both in dyads and in
networks (Raub & Weesie 1990 distinguish
between reputation in narrow and broad
senses).
Hypothesis 6: The more a transaction is embedded
in a voice network, the less effort will be invested
into the management of the transaction.
VOLUME 43
Exit network.
The buyer’s exit network refers to options for
buying a product or service of the same kind
from an alternative supplier. A smaller exit
network increases the cost to the buyer of
switching suppliers. Hence, the buyer becomes
more dependent on a supplier. Fewer and less
attractive exit options of the buyer provide a
supplier with more incentives to behave opportunistically, for example, by somewhat reducing
the quality of delivered goods. Consequently, the
buyer will put more effort into the management
of a transaction if he has fewer and less
attractive exit options.
Hypothesis 7: The more a transaction is embedded
in an exit network, the less effort will be invested
into the management of the transaction.
Earlier, we discussed the effects of transactionspeciŽ c investments on management effort.
Transaction-speciŽ c investments have lock-in
effects. A situation where multiple suppliers are
available ex ante transforms into a bilateral
monopoly ex post (Williamson 1985). This
implies that when speciŽ c investments are
made, the effect of the exit network will be
smaller. This leads us to the following conditional hypothesis:
Hypothesis 8: The more speciŽ c investments, the
smaller the effect of the exit network on the
management of the transaction.
Institutional embeddedness
The existence of institutions like the law creates
the possibility of sanctioning opportunistic
behaviour. Agreements and commitments can
be made legally enforceable. Consequently,
institutional embeddedness makes agreements
and commitments credible: transactions take
place under the shadow of the law. Countries
with less efŽ cient legal systems make it harder
for buyer and supplier to make agreements
legally enforceable. If buyer and supplier come
from different countries, the enforcement of
agreements via the law is more difŽ cult, e.g.,
Ž rms know the other system less well than their
own. The buyer’s access to the institutions is
more difŽ cult. The use of institutions has
become more expensive. To get the same level
of safeguarding against possible opportunism,
the buyer must make a greater effort. In
addition, more effort has to be made to safeguard the transaction, because the supplier
knows it is difŽ cult for the buyer to make use of
the institutions. So, the supplier has an extra
Inter-firm Co-operation and Social Embeddedness 129
incentive to behave opportunistically. This leads
to the following hypothesis:
Hypothesis 9: The less well a transaction is
embedded institutionally, the more effort will be
invested into the management of the transaction.
Expertise of the buyer
In this last section of the theoretical part of this
paper, we focus on a characteristic of the
purchase manager instead of a characteristic
of the transaction. The costs of management of
a transaction depend on the expertise and
experience – the human capital (see Becker
1993) – of the purchase manager who manages
the transaction. The lower the costs of management – more human capital being available –
the more beneŽ t one unit of effort of management will have. Then again, the time spent on
management will be more expensive. A purchase manager with more human capital will
be able to regulate more in one time unit and,
hence, compared to a purchase manager with a
smaller amount of human capital, he or she will
put less effort into the management of a
transaction.
Hypothesis 10: The more human capital a purchase
manager possesses, the less effort he or she will
invest into the management of the transaction.
3. Method
To test the hypotheses (see Blumberg 1998;
Batenburg et al. 1999; Buskens 1999 for related
research using survey data), we conducted a
vignette experiment, also known as the ‘factorial survey approach’ (Rossi & Anderson 1982).
In a vignette experiment, vignettes are used to
elicit judgements. A vignette is a short description of a person or a situation that contains
information that is considered relevant and that
is presented to respondents to obtain a judgment about that person or situation. Here,
vignettes were used to describe virtual transactions. Purchase managers from the business
community judged the vignettes. Each purchase
manager had to judge several vignettes, all
different. The purchase manager then had to
judge how much effort he or she would in fact
invest into the management of a transaction
represented by each of these vignettes if
confronted with such a transaction in his or
her business. Obviously, a vignette design
creates the potential problem that respondents
have to make hypothetical decisions and do not
necessarily behave as they would if the transactions were real. Note, however, that a vignette
design also has at least one major advantage in
the present context: namely, our hypotheses
assume transaction and embeddedness characteristics as given and exogenous. In fact, this
will often be a problematic assumption. In
particular (see Buskens 1999: Chapter 5),
network embeddedness will be endogenous
because buyers search for competent, reliable
and trustworthy suppliers, certainly so if
transactions are associated with serious risks.
Searching, however, affects network embeddedness, since it yields information on and access to
other buyers from the supplier as well as to
alternative suppliers. Much more than, for
example, a survey on real transactions, a
vignette design allows us to abstract from
problems due to the endogeneity of transaction
and embeddedness characteristics.
Operationalization of transaction
characteristics and social embeddedness
The virtual transactions are represented by
eight characteristics. These vignette characteristics operationalize the variables we expect
theoretically to have an effect on management
effort. Figure 1 describes the vignette characteristics by the chosen categories. While operationalizing institutional embeddedness, we
assumed a higher number to mean that a
Dutch purchase manager is more familiar with
the institutions of the supplier’s country. The
vignette characteristic that operationalizes the
shadow of the past consists of three categories.
Every category indicates whether or not a
relationship exists. In addition, two of the
categories refer to the success of the relationship. According to a study by Batenburg et al.
(1999), transactions with an unsuccessful past
are very scarce. Vignettes should be realistic
(Faia 1980); for this reason we omitted unsuccessful pasts. However, we varied the degree of
success of the relationship. One category
presented a successful past; the second presented a somewhat less successful past, where
minor problems sometimes occurred. We operationalized the shadow of the past as the length
of the relationship and the success of the
relationship. Considering the validity and reliability of the judgements, we chose to represent a
limited amount of information in a vignette, to
prevent cognitively overloading respondents.
By varying the categories of the vignette
characteristics, multiple vignettes can be
created. One value (category) of each vignette
130 ACTA SOCIOLOGICA 2000
VOLUME 43
Fig. 1. Description of vignette characteristics.
characteristic is put on the vignette. The
population of vignettes, the total number of
unique vignettes, thus consists of all possible
combinations of the different categories of the
different characteristics. The total number is
7,290 vignettes. Figure 2 shows one vignette
from this population.
Operationalization: effort
Each respondent was asked to provide an
estimate of the effort he or she would put into
the management of a transaction in reality. We
distinguish two aspects of effort: time and
involvement of departments. ‘Time investments’
refers to the total time spent on negotiations for
the management of a transaction. This was
measured on a Ž ve-point scale. ‘Involvement of
departments’ refers to the number of depart-
ments involved in negotiations for the management of the transaction. In addition to the
purchase department, the following departments of a buyer are distinguished: the production department, development department,
quality service, legal department and general
management. The correlation between the
number of departments involved and time
investments is reasonably high (r = 0.45;
p = 0.000). To get an indication of the total
number of man-hours spent on the management of the transaction, management effort is
operationalized as the product of invested time
and the number of departments involved in
management.
Operationalization: human capital
The human capital of a purchase manager is
Inter-firm Co-operation and Social Embeddedness 131
Fig. 2. Example of a vignette.
measured as the number of years of operational
and strategic buying experience of that purchase manager.
Control variable: practical experience with
vignette
According to Faia (1980), efforts should be
made to ensure that the vignettes being judged
are realistic. To control this, we asked respondents to state how far the vignette resembles
their own practice. This was measured on a Ž vepoint scale.
Control variable: course
Our respondents are participants on a course for
Dutch purchase managers; data were collected
from participants in an earlier course as well as
an ongoing course (see below). To control for
possible differences between ex-participants and
participants in the ongoing course, we included
a dummy variable in our analyses.
Data collection
Our respondents are 40 participants and exparticipants on a management course on
‘strategic purchase’. This course is designed
for purchase managers of medium-sized and
large Ž rms in The Netherlands. The purchase
managers were mostly senior buyers, heads of
purchasing departments or strategic purchase
managers. The data were collected in February
1995 during two meetings. The Ž rst meeting
was a reunion attended by a group of 16 exparticipants in the course; the second meeting
was attended by a group of 24 participants in an
ongoing course. Each participant was given a
set of 10 vignettes. Eight of the 10 vignettes
were part of a random sample (no duplicates
were allowed) from the total number of unique
vignettes (n = 7,290). To increase variance in
transaction characteristics, we added two vignettes to each of the eight randomly selected
vignettes, one with a relatively ‘problematic’
transaction and one with a relatively ‘unproblematic’ transaction. A transaction is considered to be problematic if we expect that on the
basis of the ‘economic’ characteristics, a considerable amount of effort will be invested into
the management of the transaction. The two
vignettes were drawn from a subpopulation of
vignettes that are made up of, respectively,
problematic or unproblematic scores on the
economic characteristics and random scores on
embeddedness characteristics.
The Ž rst group of 16 participants judged all
10 vignettes, for a total of 160 vignettes. The
second group had to work with a time limit. As a
result, not every participant judged all 10
vignettes. The total number of vignettes in the
second group came to 190. The total number of
vignettes was 350, 40 of which were ‘problematic’ and 35 ‘unproblematic’ transactions. Two
vignette judgements contained too many missing values and were removed from the data set.
Hence, our analyses are based on 348 vignettes.
Analytical strategy
One purchase manager judged multiple vignettes. Therefore, our data are characterized by a
hierarchical structure (vignettes ‘nested’ in
purchase managers). Ordinary least square
estimation on nested data involves some wellknown problems (see, for example, Bryk &
Raudenbush 1992). Standard errors are under-
132 ACTA SOCIOLOGICA 2000
VOLUME 43
Table 1. Multi-level regression analysis of the effort invested in the management of transactions (unstandardized regression
coefŽ cients, standard errors in brackets, n = 348, 40 purchase managers).
Hypothesis
Constant
Transaction characteristics
SpeciŽ c investments
Uncertainty
Volume
Embeddedness of transaction
Past
Future (dummy,
future = 1)
Voice network
Exit network
Institutional
embeddedness
Interaction effects
Future past
Exit network
investments
Respondent characteristic
Human capital
Control variables
Practical experience
with transaction
Course (dummy,
reunion = 1)
Model Ž t
Difference in deviance
SigniŽ cance difference
+
+
+
Model A
Model B
Model C
Model D
- 0.006
0.016
0.021
0.023
0.202*** (0.043)
0.182*** (0.046)
0.639*** (0.044)
?
0.157*** (0.043)
0.149*** (0.047)
0.626*** (0.043)
0.144*** (0.043)
0.158*** (0.046)
0.633*** (0.043)
- 0.099** (0.040)
- 0.033 (0.068)
- 0.037 (0.067)
0.048 (0.062)
0.139*** (0.043)
0.154*** (0.046)
0.627*** (0.043)
0.056 (0.062)
- 0.032 (0.067)
-
- 0.061* (0.042) - 0.068* (0.039) - 0.070* (0.042)
- 0.051* (0.045) - 0.057* (0.045) - 0.064* (0.045)
- 0.106*** (0.026) - 0.110*** (0.025) - 0.102*** (0.026)
-
- 0.269*** (0.084) - 0.280*** (0.084)
-
- 0.003** (0.001)
0.013 (0.049)
0.018 (0.049)
- 0.063 (0.043)
- 0.022 (0.131)
250.70 (3df)
p = 0.000
26.74 (5df)
p = 0.000
10.23 (2df)
p = 0.006
6.28 (3df)
p = 0.099
* p < 0.05; ** p < 0.01; *** p < 0.001.
estimated (or in some cases overestimated)
because residuals are not independent. The
Hierarchical Linear Model (HLM) or Multi-Level
Model offers a solution to these statistical
problems. Conceptually, HLM can be seen as a
hierarchical system of regression equations: a
regression equation at the level of transactions
and a regression equation at the level of
purchasing managers. By adding a regression
equation at the level of purchase managers, it is
possible to model systematic differences in
management between purchase managers and
to explain these differences, e.g., via differences
in human capital. We made use of the program
ML3 (Prosser et al. 1991) for this estimation. It
estimates the coefŽ cients on both levels simultaneously.
4. Results
Table 1 presents the results of the test of our
hypotheses. Four models are presented. In each
model, variables are added to the regression
equation. The ‘deviance’, which is presented at
the bottom of the table, indicates the degree to
which the model Ž ts the data. The lower the
deviance, the better the Ž t. If two models are
nested – one model is a special case of the other
– then the difference in deviance has a Chisquare distribution. The degrees of freedom are
then equal to the difference in the number of
estimated parameters in the two models (Hox
1995).
The hierarchical linear model enables us to
model differences in management between
purchase managers. To do this, the intercept
or regression coefŽ cients are allowed to vary.
This results in estimations on the level of
vignettes and the level of the purchase managers. These so-called ‘variance components’
are presented in Table 2. We do not present the
proportion of explained variance. In regression
models, it is only meaningful to present
explained variance if the design is observational
(Snijders & Bosker 1994). Experimental
Inter-firm Co-operation and Social Embeddedness 133
Table 2. Differences in judgment among purchase managers: variance components of three models.
Variance on level purchase managers
Intercept
Slope volume
Slope transaction-speciŽ c investments (t.s.i.)
Covariance
Intercept, slope t.s.i.
Intercept, slope volume
Slope t.s.i., slope volume
Variance on level vignettes
Error variance
Empty model
Model E
Model F
0.096 (0.046)
0.127 (0.036)
0.069 (0.027)
0.045 (0.022)
0.112 (0.034)
0.060 (0.025)
0.040 (0.020)
0.072 (0.023)
0.046 (0.023)
- 0.009 (0.017)
0.064 (0.021)
0.034 (0.021)
- 0.015 (0.016)
0.284 (0.026)
0.282 (0.026)
0.901 (0.072)
research is characterized by the fact that the
researcher determines the stimuli, and therefore
also the variance of the independent variables.
This variance, partly, in uences the amount of
explained variance. Therefore the explained
variance depends on the construction of the
vignette characteristics. Rossi and Anderson
(1982) interpret the amount of explained
variance as a measure for ‘social consensus’.
They reason as follows: if there is perfect
agreement about the ‘right’ response to a
vignette, then the regression model will predict
every vignette judgment perfectly. However,
they themselves give a number of reasons
(including measurement errors) why this measure is a dubious one.
Hypotheses testing
Model A in Table 1 gives the coefŽ cients of the
‘economic’ vignette characteristics. All three
weights are in the expected direction and are
highly signiŽ cant. Hypotheses 1, 2 and 3 are
thus conŽ rmed by the results. The purchase
managers take the volume of a transaction very
much into consideration: the coefŽ cient of
volume is more than three times as large as
the coefŽ cient of uncertainty and speciŽ c
investments.
In Model B, the main effects of embeddedness characteristics are added. The coefŽ cient of
the shadow of the past is signiŽ cant and in the
expected direction. The more a buyer and
supplier share a past, the less effort a buyer
puts into the management of a transaction. This
result supports Hypothesis 4. An analysis (not
reported here) omitting the category with a
somewhat less successful past did not change
the results. Theoretically, we were not able to
predict a main effect for the shadow of the
future, because we expect the shadow of the
future to have two opposite effects: a reciprocity
effect and an investment effect. The results of
the analysis do not give a clear clue as to which
of these effects is stronger: the coefŽ cient of the
shadow of the future is small and insigniŽ cant.
Turning to network effects, the results support
Hypothesis 6: the larger the voice network, the
less effort will be invested in the management of
a transaction. Purchase managers take the size
of the exit network into consideration when
judging a vignette: the more alternative suppliers there are, the less effort will be put into the
management. Thus, the data support Hypothesis 7. Hypothesis 9 on institutional embeddedness is also supported: the purchase managers
strongly take into account the country of a
supplier. When institutional embeddedness is
stronger, buyers will put less effort into the
management of transactions.
In Model C, we add the interaction effects.
Hypothesis 5 receives support: there is a strong
and signiŽ cant interaction between the shadow
of the future and a common past. Buyers will
put less effort into a transaction when a
common past is combined with the shadow of
the future. This effect disappears when there is
no common past, and the shadow of the future
exists. Another interaction effect was included
in Hypothesis 8, stating that transactionspeciŽ c investments will interact with the exit
network. This hypothesis is not supported by the
data.
In Model D we add the human capital
variable and the two control variables. Hypothesis 10 is supported. The amount of human
capital of a purchase manager has a signiŽ cant
and negative effect on the effort that will be put
into the management of a transaction. The
coefŽ cients of the two control variables are not
signiŽ cant. First, it does not matter if a purchase
134 ACTA SOCIOLOGICA 2000
manager recently participated in the course.
This result implies that the likelihood that
judgements will be guided by social desirability
motives is low. We would expect the group that
judged the vignettes while participating in the
course to be more prone to judge the vignettes
in a socially desirable way. Our second control
variable refers to practical experience with the
transaction described at the vignette. It turns
out that such practical experience does not
matter for the judgment of a vignette.
Note that our dependent variable, management effort, is a product of the time that a
purchase manager would invest in the management of a transaction and the number of
departments that would be involved. In analyses
not reported here, we checked to see if results
differ for different operationalizations of the
dependent variable, such as, e.g., the sum of
time invested and the departments involved. It
turns out that results are robust relative to such
variations in constructing the dependent variable.
Differences between purchase managers
Table 2 presents the variance components of
different models. The Ž rst model is the empty
model. Only the intercept is included as
explanatory variable. The empty model gives
us estimates of the variance in the effort for
management on the level of vignettes, and it
also gives us estimates on the level of purchase
managers. This makes it possible to calculate an
intra-class coefŽ cient (dividing the variance on
the level of agents by the total variance). The
intra-class coefŽ cient gives an indication of the
dependence between observations within purchase managers, and here it amounts to 0.096.
This means that about 10 percent of the
variance in management effort can be attributed to systematic differences between purchase
managers.
The explanatory variables of Model D,
the ‘economic’, ‘embeddedness’, interaction,
respondent and control variables, are also
included in Model E. Besides the intercept, the
coefŽ cients of volume and transaction-speciŽ c
investments vary in this model. Purchase
managers vary in the degree to which they
take volume and speciŽ c investments into
account. The mean slope (coefŽ cient) of volume
is 0.625. The standard deviation of that
coefŽ cient is Ö 0.069 = 0.262. This means
that about 95 percent of the purchase managers
have a coefŽ cient between 0.101 and 1.149.
The differences in the degree to which volume is
VOLUME 43
taken into account are considerable. The mean
slope for transaction-speciŽ c investments is
0.129. The standard deviation of this slope is
Ö 0.045 = 0.212. This means that about 95
percent of the judgements of purchase managers have a slope between - 0.295 and 0.552.
Again, differences between purchase managers
are considerable.
In addition to the variances of the intercept
and slopes, covariances between the intercept
and slopes can be estimated. These covariances
are also presented in Table 2. It is now possible
to calculate correlations. The correlation
between the slope of volume and the intercept
is 0.046/Ö (0.127 0.069) = 0.502. The correlation between the slope of transactionspeciŽ c investments and the intercept is 0.072/
Ö (0.127 0.045) = 0.951. Purchase managers who, on average, will invest great effort
into a transaction, take the volume of a
transaction and the amount of speciŽ c investment strongly into account in their judgements.
The variance in the slopes can be explained
by adding a cross-level interaction (interaction
between a purchase manager characteristic and
a vignette characteristic) to the model (see, for
example, Bryk & Raudenbush 1992). In Model
F, the interaction between human capital and
volume is added, as is the interaction between
human capital and transaction-speciŽ c investments. The Ž rst mentioned interaction (volume
human capital) is signiŽ cant (b = - 0.002,
p < 0.01). By adding the cross-level interaction,
the residual variance in the slope of volume
decreases. This interaction shows that the more
human capital a purchase manager possesses,
the less he or she will take the volume of a
transaction into account. The second cross-level
interaction (transaction-speciŽ c investments
human capital) is not signiŽ cant.
Results for randomly sampled vignettes
We have mentioned that our sample of vignettes
somewhat overrepresents ‘problematic’ as well
as ‘unproblematic’ transactions. In analyses not
reported here (see Selten 1996), we checked for
the robustness of the results when deleting the
additional ‘problematic’ and ‘unproblematic’
transactions from our sample. It turns out
that the results remain stable when using a
purely random sample of vignettes.
5. Conclusion and discussion
Social embeddedness of transactions makes
Inter-firm Co-operation and Social Embeddedness 135
other management mechanisms than contractual planning feasible. The results of the
vignette experiment reported here support the
notion that while managing a transaction,
purchase managers take not only ‘economic’
characteristics into account, but also the ‘social’
characteristics of a transaction. In this study,
two types of social embeddedness have been
distinguished. Structural embeddedness in
social relations covers temporal and network
embeddedness, and can be distinguished from
institutional embeddedness. In general, the
more a transaction is embedded, the less effort
will be invested into the management of that
transaction.
Compared to earlier research on ‘embeddedness effects’, we Ž rst contribute to new theory
and research on the effects of temporal embeddedness by disentangling the prior history of
transactions between a buyer and supplier from
expected future business between the partners.
We predict that a history of successful earlier
transactions between the partners will reduce
efforts invested into the management of today’s
transaction. We Ž nd empirical support for this
prediction. The main effect of the ‘shadow of the
future’ on management efforts is problematic.
Expected future business allows for conditional
co-operation, and this reciprocity effect of the
shadow of the future should reduce management effort. On the other hand, efforts invested
into the management of today’s transaction are,
at least to some degree, likewise investments in
the management of future business with the
partner. This investment effect should increase
management efforts so that the net effect of the
shadow of the future on management effort
remains undecided. However, we were able to
predict that the effect of future business depends
on whether or not Ž rms share a common past.
Investments have already been made when
buyer and supplier share a common past;
hence, the incentive to invest is diminished.
The reciprocity effect of ‘the shadow of the
future’ is thus larger in that situation. Our
prediction that the shadow of the past and the
shadow of the future will interact was supported. This interaction effect was also found in
the recent and related empirical study of
Batenburg et al. (1999). They report on a
comprehensive survey into the purchase of
information technology (hardware and software). About 800 Ž rms in The Netherlands
participated in the study. These Ž ndings suggest
that the effects of the shadow of the future and
the past can be fruitfully studied together.
Our second contribution to research on
embeddedness effects follows from the distinction between ‘voice’ and ‘exit’ networks. Both
types of networks allow for conditional cooperation via future sanctions of opportunism
in today’s transaction. Our results indicate that
both types of networks do indeed reduce
investments in transaction management. However, compared to the ‘shadow of the past’,
purchase managers take less account of the size
of voice and exit networks while judging
vignettes. A methodological reason for this
Ž nding may be found in the construction of
the vignettes. The vignette characteristic
‘shared past’ is, for a purchase manager, more
informative than the vignette characteristic
‘voice network’, where the only thing mentioned is whether or not there are shared
business partners. A second and theoretical
reason may be that diffusion of information is
costly and information gathered from third
parties may be less accurate or even strategically distorted (Lorenz 1988; Raub & Weesie
1990, 1991; Williamson 1991; Blumberg
1998; Buskens 1999). A reputation in a
network, then, will be less effective than a
reputation in a dyad. Information from ‘own’
transactions is more accurate and also cheaper.
Note a major advantage of vignette design for
research on effects of network embeddedness:
presumably, network embeddedness is endogenous in the sense that buyers search for
competent, reliable and trustworthy suppliers.
In that search, they establish ties with other
buyers and also with other suppliers. A vignette
design allows abstraction from such endogenous network characteristics.
Institutional embeddedness is the third
feature we highlight in this paper. We Ž nd a
strong effect of the nationality of a supplier on
the effort put into the management of a
transaction. Next to institutional embeddedness, the nationality of a supplier may, however,
also measure the degree to which opportunism
occurs in that country. This notion is supported
by the ‘corruption perceptions index’ (von
Lambsdorff 1998). This index measures perceptions of corruption in 85 countries. Our ranking
of countries (see Figure 1) correlates perfectly
with the ranking of the countries in the
corruption perception index. Thus, it seems
plausible that the nationality of the supplier not
only measures institutional embeddedness, but
also the degree to which opportunism is likely to
occur. Furthermore, we may measure the effects
of cultural difference on the effort invested into
136 ACTA SOCIOLOGICA 2000
management. A transaction with a German
Ž rm will cost a Dutch Ž rm less than a
comparable transaction with a Japanese Ž rm.
Japanese language and habits are less related to
the Dutch culture than German language and
habits.
First version received February 1999
Final version accepted April 1999
Acknowledgements
The authors thank Tom Snijders, Jeroen Weesie, Piet Hermkens,
and their colleagues from the research program ‘The Management of Matches’ of Utrecht University for their valuable
remarks. This research was made possible through funds of the
NEVI Research Foundation (NRS) of the Dutch Association for
Purchase Management (NEVI) for the projects ‘Co-operation
between Buyer and Supplier’ and ‘Purchase of IT Products’, as
well as by The Netherlands Organization for ScientiŽ c Research
NWO (PGS 50-370) for the PIONIER program ‘The Management of Matches’. The article is a thoroughly revised and
improved version of an earlier paper in Dutch (Rooks et al.
1997).
Notes
1
Note that here, as well as in the subsequent hypotheses,
‘effort’ refers to the effort of the buyer.
2
This part is based on Raub (1996) and Raub (1998). The
latter paper offers a game-theoretic model that allows formal
derivation of the hypotheses presented here.
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