Ambiguous Adaptation: The Effect of Formal and Informal Governance on Premature Termination

We investigate why some exchange relationships terminate prematurely. We argue that investments in informal governance structures induce premature termination in relationships already governed by formal contracts. The formalized adaptive behavior of formal governance structures and the flexible and reciprocal adaptation of informal governance structure create ambiguity in situations of contingencies, which, subsequently, increases the likelihood of premature relationship termination. Using a large sample of exchange relationships in the global service provider industry, we find support for a hypothesis suggesting that increased reliance on informal governance structures, given existing formal governance, increases the likelihood of a premature relationship termination. This has important implications for our understanding of the relationship between different governance structures in exchange relationships.