Do Exchange Hazards Always Foster Relational Governance An Empirical

Intern. J.
of Research in Marketing 23 (2006) 63 77

www.elsevier.com/locate/ijresmar
Do exchange hazards always foster relational governance? An empirical

test of the role of communication
Shibin Sheng a,, James R. Brown b , Carolyn Y. Nicholson c , Laura Poppo d
a
School of Business, Adelphi University, Garden City, NY 11530, USA

College of Business and Economics, West Virginia University, Morgantown, WV 26506-6025, USA
Department of Marketing, School of Business Administration, Stetson University, Deland, FL 32720-3774, USA
d
Management Department, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061, USA
b
Abstract
This empirical paper explores economic and social origins of relational governance. Previous empirical research has provided substantial
support for the positive relationship between exchange hazards (such as transaction specific assets or decision uncertainty) and relational
governance. In contrast, we use transaction cost economics to argue that exchange hazards might limit the use of relational governance when
power asymmetry exists within a marketing channel. Moreover, from a sociological perspective, a governance mechanism is not determined solely
by initial exchange conditions; the process in which the interorganizational exchange emerges and develops also influences it. We argue that the
social contact that occurs through inter-organizational communication not only is a critical determinant of relational governance, but it also may
moderate opportunism arising from exchange hazards, thus increasing the establishment of relational governance. Overall, the empirical results
support our hypotheses.
2006 Elsevier B.V. All rights reserved.
Keywords: Exchange hazards; Marketing channel; Relational governance; Communication
1. Introduction
Scholars of marketing channels have long been interested in
the design of interfirm governance mechanisms (i.e., interorganizational structures and behavior modes) that promote
coordination and deter conflict, punitive action, and opportunistic behaviors. Many channel relationships blend market
and hierarchy elements and exist as hybrid forms (Williamson, 1991). Heide (1994; also Rindfleisch & Heide, 1997) has
conceptualized hybrid governance mechanisms as unilateral
(contractual authority) and bilateral (relational governance).
In this study, we explore bilateral (relational) governance, where
firms share mutual interests, view theirs as a long-term
relationship, engage in joint planning, and make bilateral
adjustments to the changing market environment (Heide, 1994).
According to the logic of transaction cost economics (TCE),
relational governance functions as a mechanism to attenuate
hazards resulting from exchanges among marketing channel
Corresponding author. Tel.: +1 516 877 4608; fax: +1 516 877 4607.
E-mail address: sheng@adelphi.edu (S. Sheng).
0167-8116/$ - see front matter 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijresmar.2006.01.006
firms (Rindfleisch & Heide, 1997). Thus, this logic suggests a

positive association between exchange hazards and relational
governance: the more that firms face potential exchange hazards,
the more that relational governance will be used to limit those
exchange hazards (Anderson & Weitz, 1992; Brown, Dev, &
Lee, 2000; Gundlach, Achrol, & Mentzer, 1995; Heide & John,
1990; Jap & Ganesan, 2000; Noordewier, John, & Nevin, 1990).
However, do exchange hazards always foster relational
governance? Previous empirical research generally has ignored
the possible negative impact that exchange hazards may have on
relational governance. We believe this to be due, in part, to
relationship contingencies that previously have not been taken
into accountcontingencies such as power asymmetry in the
relationship. Power asymmetry increases the likelihood of
opportunism (cf., Provan & Skinner, 1989), and therefore
impedes the development of the shared relational values,
loyalty, and trust (cf., Gassenheimer, Baucus, & Baucus, 1996).
The lack of understanding about how the relationship between
exchange hazards and governance mechanisms vary as a
function of interorganizational contingencies represents a
significant gap in the literature. Hence, our research adds to
64
S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377
Fig. 1. Exchange hazards and governance structure in power asymmetry: The moderating effect of communication.
the literature that explores the relationship contingencies and

TCE, such as the study by Rokkan, Heide, and Wathne (2003)
who find that transaction specific assets can both promote and
reduce opportunism of the receiver's part, depending upon the
relational context in which the investments are deployed.
As opposed to TCE, which investigates how initial exchange
conditions (i.e., exchange hazards) influence the choice of
governance mechanisms, others argue that relational governance
emerges from pre-existing social contacts and interactions
between partners in the social network (Jones, Hesterly, &
Borgatti, 1997; Macaulay, 1963; Ring & Van De Ven, 1994). In
this sense, a social process embeds the choice of governance
mechanisms (Ring & Van De Ven, 1994), which can be examined
by the type of communication between the two trading parties.
While task- and planning-related (i.e., instrumental) communications are central to economic exchange, interpersonal, social
communications also are critical to the effective functioning of
relational governance (Granovetter, 1985; Larson, 1992; Ring &
Van De Ven, 1994; Uzzi, 1997). Thus, both instrumental and
social communications shape the development, maintenance, and
effectiveness of relational governance.
Previous empirical research has established the importance
of communication in shaping individual characteristics of
relational governance, such as trust, commitment, coordination,
and cooperation (e.g., Anderson & Weitz, 1992; Balabanis,
1998; Bialaszewski & Giallourakis, 1985; Guiltinan, Rejab, &
Rodgers, 1980; Mohr, Fisher, & Nevin, 1996; Morgan & Hunt,
1994). We extend that research by viewing relational governance as a higher-order construct (e.g., Noordewier et al., 1990)
and investigating the impact of communication upon it. Further,
previous research has investigated marketing channel communication in terms of its collaborativeness, that is, its frequency,
direction, modality, and influence content (e.g., Ahmed & AlMotawa, 1997; Mohr et al., 1996; Mohr & Sohi, 1995). Other
researchers have focused solely upon the influence content of
marketing channel communications (e.g., Boyle, Dwyer,
Robicheaux, & Simpson, 1992; Frazier & Rody, 1991; Frazier
& Summers, 1984, 1986; Simpson & Mayo, 1997; Simpson &
Paul, 1994). We depart from both of these perspectives by
investigating marketing channel communication in terms of its
content issues, rather than its influence content. Specifically, we
examine the extent to which communication within the channel
is characterized by goal-related, task-related, or social commu-
nications. In these ways, we add to what is known about the

impact of marketing channel communications upon relational
governance.
Moreover, we believe that marketing channel communications can affect the link between exchange hazards and relational
governance. As no study to date has examined the role of
channel communications in moderating the impact of exchange
hazards, this represents another gap in the literature, one that we
hope to close.
In short, the purpose of this article is three-fold. First, we
propose that, under power asymmetry, exchange hazards, such
as a dealer's decision-making uncertainty and its investment in
transaction specific assets, will be negatively related to the extent
of relational governance in the channel. This contrasts to the
prevailing view that managers select relational governance in
response to exchange hazards, presumably to mitigate opportunism. We test this proposal empirically. Second, we investigate
empirically the effect of communication content on relational
governance. Finally, we examine how interpersonal communication moderates the impact of exchange hazards upon relational
governance. Fig. 1 depicts the theoretical relationships that we
explore in this research.
2. Conceptual framework and hypotheses
One approach to examining the emergence of relational
governance is to view it as an efficient response to exchange
hazards. Exchange hazards, as defined here, are the vulnerabilities that firms face in dealing with one another as a result of
bounded rationality and potential opportunism (cf. Williamson,
1996, p. 12). Scholars have uncovered three primary hazards to
exchange: asset specificity, behavioral uncertainty, and environmental uncertainty (Rindfleisch & Heide, 1997). Here, we
focus only on the impact of asset specificity and environmental
uncertainty upon relational channel governance.
Borrowing from TCE logic, scholars advance the notion that
as exchange hazards become increasingly severe, managers
employ relational governance to minimize probable opportunistic behavior (Heide & John, 1990; Macneil, 1978). For simple
exchanges (i.e., those with low levels of exchange hazards),
relational governance is unnecessary because the invisible hand
of market competition regulates simple transactions (Williamson, 1985). Further, contingent contracts, which specify
monitoring techniques, penalties for non-compliance, and

formal rules and processes (Stinchcombe, 1985; Macneil,
1978), provide adequate safeguards for slightly more complex
exchanges. Yet, as exchanges become more hazardous, contracts
become necessarily incomplete and market competition
coupled with contingent contracts can no longer adequately
discipline behavior. Opportunism becomes probable, and
managers either vertically integrate or select relational governance to safeguard their exchanges from opportunism (Artz &
Brush, 2000; Bradach & Eccles, 1989; Heide & Stump, 1995;
Macneil, 1978; Noordewier et al., 1990). Following previous
research (Heide, 1994; Heide & John, 1992; Lusch & Brown,
1996; Rindfleisch & Heide, 1997), we explicitly define
relational governance as a mechanism in which interorganizational exchange is regulated through a set of norms that
circumscribe acceptable behavior between exchange partners.
Researchers traditionally regard relational governance as a
multidimensional phenomenon (Heide & John, 1992), but there
is little consensus as to the dimensions that characterize
the construct (Heide & John, 1990, p. 25). Several different
dimensions of relational governance have appeared in the
literature (i.e., preservation of the relationship, role integrity, and
harmonization of conflict in Brown et al., 2000; joint planning
and joint problem solving in Claro, Hagelaar, & Omta, 2003;
flexibility, information exchange, and solidarity in Heide &
John, 1992 and Lusch & Brown, 1996; solidarity, information
exchange, and participation in Jap & Ganesan, 2000; flexibility,
assistance, information provided, monitoring, and expectation of
continuity in Noordewier et al., 1990). Each of these
operationalizations emphasizes specific dimensions of the
relationship, and is not contradictory because relational
governance does not exist in a context-free vacuum. It must
be operationalized in the context of a specific exchange
(Noordewier et al., 1990, p. 84). In the current study, we
operationalize relational governance as a second-order construct, as Heide and John (1992) and Noordewier et al. (1990)
have done, focusing on three dimensions: trust, loyalty, and
shared values (Dwyer & Oh, 1987; Johnson, 1999; Poppo &
Zenger, 2002). Trust is a critical construct in relational exchange
(Dwyer, Shurr, & Oh, 1987; Morgan & Hunt, 1994; Wilson,
1995), for it represents the extent to which parties are willing to
rely on each other (Moorman, Deshpande, & Zaltman, 1993). It
assures partner reciprocity and nonopportunistic behavior
(Ganesan, 1994; Morgan & Hunt, 1994). It also reflects the
confidence each has in the other's integrity and reliability
(Anderson & Narus, 1990; Morgan & Hunt, 1994). Loyalty is
the desire to remain in and maintain a relationship with the other
party in the channel relationship (Hibbard, Kumar, & Stern,
2001), reflecting expectation of continuity. Shared values exist
when exchange parties perceive themselves as holding basic
business norms and values that are similar.
2.1. Transaction specific assets and relational governance
Transaction specific assets (TSA) are those assets that have
little or no value outside the focal exchange relationship
(Williamson, 1985). Thus, each party to the transaction can
65
potentially and unfairly reap the benefits of the other firm's

investments in TSAs. Researchers have studied the relationship
between transaction specific assets and relational governance
(Anderson & Weitz, 1992; Ganesan, 1994; Heide & John, 1990)
and have found a positive relationship between transaction
specific assets and relational governance, as suggested by the
TCE framework. However, others have not found a relationship
between asset specificity and relational governance when model
specification includes the complementary relationship between
relational governance and contract complexity (Poppo &
Zenger, 2002). Instead, a positive relationship exists between
asset specificity and contract complexity.
Consistent with this, we suspect that this positive relationship
does not exist universally, or more specifically, does not exist in
a channel when an investing party has relatively less power in the
relationship. Consistent with our proposition, Heide and John
(1988) find that agencies with more transaction specific assets in
their relationship with a principal attempted to bond themselves
more closely to a third party (i.e., their customers), because
such agencies are much smaller firms than the principals (p.
21), and power leans toward the principals. Similarly, Brown et
al. (2000) fail to observe a negative relationship between a
hotel's transaction specific asset and opportunistic behavior
towards its headquarters. We suspect that this might be due to
power asymmetry in the relationship, with the brand headquarters having more power over individual hotels.
Common to research by Anderson and Weitz (1992),
Ganesan (1994), and Heide & John (1990) is the presumption
that firms invest in transaction specific assets and then use
relational governance to safeguard those assets. In these studies,
however, the overall bargaining position of the exchange
partners is not investigated. That is, we do not know how
dependent the buyer is upon the supplier, or alternatively,
whether the buyer has viable alternative sources of supply. From
a game theoretic perspective, interdependence and power
asymmetry determine the relative bargaining power of the
game players. Less dependent bargainers are more powerful;
they have more alternatives, thereby allowing them to threaten
to abandon the current bargaining partner to seek better
alternatives (Anandalingam, 1987; Fisher & Ury, 1981).
High levels of power asymmetry characterize some
distribution channels (Anderson & Narus, 1990; Frazier &
Rody, 1991; Heide & John, 1988; Kumar, Scheer, &
Steenkamp, 1995). In these situations, a buyer's investment
in TSA may be due to the requirements of a powerful
suppliernot due to the desire to build cooperation and
bilaterialism in the exchange relationship. That is, the
manufacturer can use its superior position to request changes
of its partner that it believes will singly increase its own
outcomes from the relationship (Anderson & Narus, 1990,
p. 43). The empirical setting of the present study is franchised
dealers (i.e., distributors) of farm equipment. In this channel,
a manufacturer (supplier) works with many dealers and can
establish new dealership agreements at will, but each dealer
can only work with a much more limited number of suppliers.
Hence, because the dealer is more dependent on the
manufacturer in this setting, the manufacturer has the
66
bargaining power advantage and, therefore, greater control in

the relationship.1
In particular, a dealer's TSA can exacerbate its vulnerability in this
situation, thereby inhibiting the emergence of relational governance.
As discussed above, transaction specific assets place the dealer in a
vulnerable position because: (1) the dealer can lose the nonsalvageable portion of its TSA investments if the relationship is
terminated prematurely; and (2) the supplier can use the specific
assets as hostage (Williamson, 1996), which makes it difficult for
retailers to recoup the value of their investment (Jap & Ganesan,
2000). Thus, as the investing party, the retailer will always desire to
protect their vulnerability by developing satisfactory safeguards. One
possibility is to increase contract complexity (Poppo & Zenger,
2002), but this is unlikely if the investor of TSAs has relatively less
powerful, as in our channel context. A second possibility is vertical
integration, but it is impossible in this case given the weaker position
of the retailer. A third possibility is to bond with a third party, for
example, clients as documented by Heide and John (1988). This is
also difficult in many channel relationships, especially where these
third parties have alternatives. Therefore, a relatively weak retailer
will not be inclined to behave in a relational fashion for fear of being
further taken advantage of by the more powerful supplier.
On the other hand, dealers' investments provide little
incentive for the supplier to be committed to the relationship
in the long run; therefore, the dealer's TSA will adversely
influence its perception of a supplier's commitment (Gundlach
et al., 1995; Jap & Ganesan, 2000). Supplier commitment
represents the supplier's desire to develop a stable relationship
with the retailer and a willingness to make short-term sacrifices
to maintain the relationship to ensure that it endures indefinitely
(Anderson & Weitz, 1992; Morgan & Hunt, 1994). Because of
the dealer's dependency on the supplier and the specialized
investments that are likely to be mandated by the supplier, trust
and loyalty are unlikely to develop. In effect, the power
dependency inhibits the kind of reciprocity, give and take, that
is necessary for such relational constructs to develop. As a result,
the dealer is unlikely to see itself as similar to the supplier in
terms of basic business norms and values (cf. Nicholson,
Compeau, & Sethi, 2001). In effect, the greater the level of
specific investments the supplier forces the dealer to take on,
the lower is the level of relational governance. Consistent with
this logic, we propose:
H1. Under conditions of strong power asymmetry in favor of
the supplier,2 the dealer's level of investment in transaction
specific assets is negatively associated with the extent of
1
For example, 72.43% (S.D. = 19.96) of the average dealer's sales in our
sample is derived from its largest supplier. Moreover, anecdotal evidence based
on interviews in the industry suggests that franchisees regularly feel that the
franchisor is keeping them under their thumb.
2
We do not explicitly measure power asymmetry in this research. Although
farm equipment dealers are granted local monopolies through exclusive
territories (Skinner & Guiltinan, 1985), farm implement manufacturers do not
rely very heavily upon any one dealer for a large fraction on their overall sales
volume. Dealers, however, depend considerably upon their major suppliers.
Hence, this high degree of downstream dependence (cf. Frazier & Rody, 1991,
Fig. 1) or power asymmetry is believed to be a general characteristic of the farm
equipment channel.
relational governance it perceives in its relationship with its

major supplier.
2.2. Decision uncertainty and relational governance
Environmental uncertainty refers to unanticipated changes in
circumstances surrounding an exchange (Noordewier et al.,
1990). Although most scholars acknowledge this conceptual
definition, its measurement is typically quite broad and
incorporates many different kinds of uncertainty: unpredictability of the environment (Anderson, 1985; Noordewier et al.,
1990), unpredictability of volume (Heide & John, 1990),
unpredictability of technology (Heide & John, 1990; Poppo &
Zenger, 2002), and decision-making uncertainty (Ganesan,
1994; Joshi & Stump, 1999). Regardless of the type of
uncertainty, it exists because of insufficient information
(Driskell & Goldstein, 1986; Duncan, 1972; Huber & Daft,
1987) which makes planning and decision-making difficult
(Achrol & Stern, 1988). For instance, in the farm equipment
industry, if information is not readily available regarding the
farmer's equipment preferences, the dealer cannot accurately
predict demand. That is, the dealer cannot determine exactly
which equipment models to stock and to market aggressively, as
well as how much total inventory is necessary.
Because adaptation is a primary consequence of uncertainty
(Rindfleisch & Heide, 1997, p. 31; see also Williamson, 1985),
most try to ease the negative effects of uncertainty. For example,
by employing relational norms, and thus creating a basis of
trust, decision-makers can act as if the future is more certain
(Zajac & Olsen, 1993). They can do so because partners act as if
the expected value of the exchange were stable, even in the
presence of uncertainty (Luhmann, 1979). Contrary to this
logic, however, relational governance may not necessarily ease
adaptation. Williamson (1996, p. 116) explains that although
the efficacy of all forms of governance may deteriorate in the
face of more frequent disturbances, the hybrid mode [namely,
bilateral or relational governance (cf. Rindfleisch & Heide,
1997) is arguably the most susceptible, because hybrid
adaptations cannot be made unilaterally (as with market
governance) or by fiat (as with hierarchy) but require mutual
consent. Because relational governance requires mutual
consent, it not only delays decision-making, compared to the
ideal types of market and firm governance, but also presents the
opportunity for strategic positioning, thereby decreasing the
likelihood of equitable outcomes (Williamson, 1996). Moreover, it will be more difficult for a less powerful party (here, the
dealer) to request the more powerful party (the supplier) to
accommodate modifications or change plans under environmental uncertainty. Therefore, the dealer will be more likely to
sway away from relational governance.
In contrast to relational governance, market governance
facilitates adaptations to uncertainty. First, one party can
respond efficiently without consulting the other. Next, changes
in consumer preferences and demand can be fluidly coordinated
through market mechanisms (e.g., price and competitive
sources of supply, Williamson, 1996). That is, rather than
renegotiating the contractual agreement, the dealer can simply
adjust to changes in demand or supply by buying less or buying

different kinds of equipment. For example, Ganesan (1994, p. 6)
explains diversity within a market will encourage a retailer
to develop relationships with multiple channel partners capable
of handling the demands of specialized markets. Thus, firms
will prefer market governance to relational governance for
dealing with increasing decision uncertainty. Further, trust and
commitment rarely thrive unless reciprocated (Anderson &
Weitz, 1992). Given the dealer's likely preference for market
governance under conditions of decision uncertainty, the
supplier also is less likely to develop extensive trust in or
loyalty to its dealer, which will inhibit the growth of relational
governance. Hence, we believe that:
H2. Under conditions of strong power asymmetry in favor of
the supplier, the degree of decision uncertainty perceived by the
dealer will be negatively related to the extent of relational
governance it perceives in its relationship with its major
supplier.
2.3. Communication and relational governance
Communication plays a vital role in coordinating economic
exchange. Three broad forms of organizational communication
enable this (Sullivan, 1988). First, task-related communication
in the context of our study reflects the dealer's exchange of
information with its supplier that pertains to the dealer's specific
operations or decisions. Second, goal-related communication is
more superordinate and is aimed at eliciting the grander channel
scheme that depicts the roles of both parties in making products
available to target customers. Task-related and goal-related
communications are reflective of a higher-order form of
communication, instrumental communication. Instrumental
communication is the interpersonal exchange of information
directly related to channel business activities and is aimed at
reaching the business objectives of the channel. The third broad
communication form, social communication, is defined as the
exchange of personal information in which parties exchange
non-work-related conversations, such as outside interests, or
engage each other in purely social meetings. Previous research
on marketing channel communication primarily focuses on
business-related content, i.e., instrumental communication.
However, complex, personal, and non-economic contacts in
business relationships are very important as well (Granovetter,
1985; Uzzi, 1997). As Nicholson et al. (2001, p. 3) contend,
previous studies of interorganizational relationship have
focused on impersonal, detached, and dispassionate analytical
antecedents (of trust)less attention has been paid to the role
played by the more personal and emotional factors. We
contend that both instrument and social communication play
vital roles in marketing channels.
Instrumental communication facilitates the transfer of
information about current and future tasks. For example,
communication is described as a way to organize and
coordinate interorganizational tasks (Eisenberg & Goodall,
1993). It is reciprocal, simultaneous, and goal-directed
activity (Watzlawick, Beavin, & Jackson, 1967). Moreover,
67
it is the glue that holds together a channel of distribution

(Mohr & Nevin, 1990). Empirically, communication has been
positively associated with cooperation (Balabanis, 1998),
coordination (Guiltinan et al., 1980; Mohr et al., 1996), and
the quality of manufacturer support for dealer activities
(Ahmed & Al-Motawa, 1997).
Less understood, however, are the types of communication
that are critical to the establishment of relational values. We
advance that both instrumental and social communication are
necessary. For example, Zajac and Olsen (1993, p. 139)
describe how firms in nascent inter-organizational relationships are initially likely to communicate general information
pertaining to the goals, tasks, and plans for the relationship,
including an assessment of mutual and individual interests.
Through ongoing communication, expectations about shared
values are forged and commitments tested (Zajac & Olsen,
1993, p. 139). Communicating task- and planning-related
information is critical to the establishment of relational
governance because it is a central mechanism through
which normative behaviors are tried and tested and through
which necessary adaptations are made to address unexpected
problems and conflicts (Heide, 1994; Williamson, 1991; Zajac
& Olsen, 1993). Over time, consistent communication and
behavior become characterized by the relational values of
trust, loyalty, commitment, and bilateralism (Anderson &
Narus, 1990; Van de Ven & Walker, 1984). Based on this
logic, we posit that:
H3. Increases in instrumental communication between the
dealer and its major supplier will lead to greater perceptions of
relational governance in the dealersupplier exchange
relationship.
While researchers recognize the importance of task- and
planning-related communications, they also understand the role
of social communication. For example, Macneil (1978, p. 902)
agrees that communication of plans and tasks typifies relational
partnerships, but argues that complex, personal, and noneconomic satisfaction is very important as well (see also
Granovetter, 1985). For example, managers involved in
relational ties describe their partners in the following ways:
you have an interest in what they're doing outside of business
and they're part of the family (Uzzi, 1997, p.42). In addition,
social communication enhances the personal ties and bonds that
may then produce trust in the other party's goodwill, or if the
goodwill preexists, it will give the parties greater flexibility to
transcend their organizationally specified roles in adapting to
changing circumstances (Ring & Van De Ven, 1994, p. 104).
Hence, more extensive social communication in marketing
channels is strongly associated with characteristics reflective of
relational governance: greater channel member satisfaction
(Ahmed & Al-Motawa, 1997; Mohr & Sohi, 1995; Mohr &
Spekman, 1994; Mohr et al., 1996), higher commitment
(Anderson & Weitz, 1992; Mohr et al., 1996; Morgan &
Hunt, 1994), and more trust (Bialaszewski & Giallourakis,
1985; Morgan & Hunt, 1994). In short, social communication is
critical because it binds the parties togetherin effect, it
embeds economic activity within a social structure and helps
68
solidify the normative expectations regarding the work-to-bedone. This discussion suggests that:
H4. Increases in social communication between the dealer and
its major supplier will lead to greater perceptions of relational
governance in the dealersupplier exchange relationship.
2.4. Moderating effect of communication on TSA
Thus far, we have argued that communication is not only a
central mechanism for coordinating economic exchange, but
also a critical determinant of relational governance. Next, we
advance the proposition that communication can attenuate the
adverse effects of exchange hazards on relational governance.
In Hypothesis 1, we argue that the dealer's TSA will
adversely affect the formation of relational norms, where the
supplier holds a strong power advantage. However, communication, in general, may also build an atmosphere of mutual
support and respect (Granovetter, 1985; Macaulay, 1963;
Macneil, 1978, 1980). In such an atmosphere, mutual expectations are developed such that future commitments can be
reached informally with a handshake (Ring & Van De Ven,
1994, p. 98). In other words, the sharing of planning and task
information that occurs through channel communication helps
shape expectations concerning which behaviors are appropriate
to the relationship and which are not. Further, social
communication enhances personal ties and bonds. Such an
exchange atmosphere limits any tendency toward opportunistic
behavior and, hence, alleviates the perceived need for more
formal safeguards (Madhok & Tallman, 1998). Thus, more
extensive goal- and task-related as well as social communication lowers the barriers to loyalty, trust, and shared values
(namely, relational governance) that may occur in channels
having imbalanced power relations. Accordingly, we propose
that:
H5. Increasing levels of instrumental communication attenuate
the negative link between the extent of the dealer's TSA
investment and the level of relational governance it perceives in
its relationship with the supplier.
H6. Increasing levels of social communication attenuate the
negative association between the extent of the dealer's TSA
investment and the level of relational governance it perceives in
2.5. Moderating effect of communication on decision
uncertainty
As we argued in Hypothesis 2, increased decision uncertainty will negatively impact the development of relational
governance. Relational governance slows down decisionmaking, thereby limiting the ability to adapt quickly to market
changes (cf. Williamson, 1996). However, we expect the level
of channel communication to moderate this negative effect.
Through increased levels of instrumental communication,
dealers share more information about local market demand
conditions with their suppliers. The suppliers, then, can
aggregate various dealer reports to develop and then communicate with the dealers their own analyses of broader buying
trends and preferences as well as competitive maneuvers and
technological advances. While this sharing of information slows
down the decision making process somewhat, it also provides
the supplier with a greater quantity of data so that they can
provide better quality information to their dealers. It also shifts
the problem-solving process from negotiation (I win; you lose)
to partnership (we both win). In effect, it demonstrates
collaborative problem solving. Hence, adaptation to the
marketplace can be more effective, albeit not as rapid, through
instrumental communication. As a result, increased levels of
communication about goals and tasks can somewhat offset the
negative impact of decision-making uncertainty on relational
governance. More formally, we believe that:
H7. Increasing levels of instrumental communication attenuate
the negative connection between the extent of the dealer's
decision uncertainty and the level of relational governance it
perceives in its relationship with the supplier.
The level of social communication operates similarly. Social
communication enhances personal ties and bonds that may then
enhance trust and lead to greater collaboration (cf. Ring & Van
De Ven, 1994). Social communication also improves the
likelihood that the channel members will work together to
address their different perspectives and adapt to marketplace
changes. As a result, the channel operates more cohesively in its
response to decision-making uncertainty, thereby providing
relational governance a better environment for flourishing. In
short, we posit that:
H8. Increasing levels of social communication attenuate the
negative link between the extent of the dealer's decision
uncertainty and the level of relational governance it perceives in
3. Method
3.1. The sample and data collection procedures
To test the general model suggested by the hypotheses and
depicted in Fig. 1, we examined the relational governance
between suppliers and retailers in the farm equipment industry.
A national sample of general managers or owners of new farm
equipment wholesale operations, SIC group 508303, provided
mail survey data used to test the hypothesized model. A list of
1777 firms, randomly selected from R.L. Polk's master list of
over 10,000 farm equipment dealers, comprised the sampling
frame. We contacted these 1777 firms by phone in advance and
mailed surveys to the 1016 who agreed to participate. The
difference was due to either out-dated information (not in
industry, out of business, etc.) or unwillingness to participate
after phone contact. Each respondent reported on the relationship with one major supplier (viz., that firm which supplied the
brand accounting for the largest percent of the dealership's new
equipment sales). Subjects also responded to a number of
questions pertaining both to their dealerships and to their
personal interactions with their supplier's current sales rep

during the previous 12 months.
Before undertaking the main study, we conducted three
independent pretests to precisely operationalize the relations
between the dealer and the supplier, refine our measurement
scales, test for possible question order effects, and hone data
collection procedures. We found that advanced agreement by
telephone increased the response rate substantially, and
uncovered no order effects.
During preliminary interviews, we asked dealers about their
links with their major supplier. These dealers reported that they
worked with their sales reps on their major business operations,
such as market positioning, determining inventory levels, and
formulating general business strategy, as well as addressing
dealer complaints and concerns. We also asked about going
over the rep's head. By and large, this was not done, with the
exception of two large dealers who indicated that they did so
only in unusual circumstances.
Because farm equipment dealers are relatively small firms
(10 or fewer employees), their major channel liaison is between
the dealership's general manager/owner and the supplier's sales
rep. Thus, the general manager/owner knows more about the
channel relationship than any other dealership personnel, and
the sales rep is the primary source of supplier information
flowing to the dealers. For these reasons, we deemed it
appropriate to use each dealership's general manager/owner to
report on its relationship with the supplier and on its
communications with the supplier's sales rep.
In the main study, we used both advanced notification and
reminder post cards to enhance the response rate. Advanced
notification allowed us to determine the individual at the
dealership who had the most knowledge of the dealership's
relationship with its major supplier. This procedure resulted in a
usable sample of 459 dealerships, representing a 26.4%
response rate based on the original 1777 firms in the sample
frame. In order to test any difference between the respondents
and non-respondents, data were collected from both sets of
nonrespondents (the ones who refused with initial contact and
the ones who agreed but did not participate). Forty-four
nonresponding firms were contacted and provided us with
some basic demographic information as well as their responses
to 8 items used in the main survey. No significant differences
between the respondents and nonrespondents on these questions
were detected.
3.2. Measures and their psychometric properties
3.2.1. Theoretical constructs
The dealer's decision uncertainty was measured along three
dimensions: (1) adequacy of decision-making information, (2)
ability to predict decision consequences, and (3) confidence in
decisions (Achrol & Stern, 1988; Duncan, 1972). These three
dimensions were examined in terms of three key decision areas:
product mix, inventory level, and sales emphasis (see Appendix
A). A second-order confirmatory factor analysis empirically
supported the three-reflective-dimension view of decision
uncertainty ( 2 = 168.95, df = 24, p = 0.00; GFI = 0.92;
69
CFI = 0.94; NFI = 0.91). All factor loadings were statistically

significant (p b 0.01) and the composite reliability coefficient
( = 0.82) met the usual 0.60 standard (Bagozzi & Yi, 1988).
We measured transaction specific assets by adopting items
from previous studies (Heide & John, 1988, 1990; Klein,
Frazier, & Roth, 1990). We also developed some additional
items to reflect the increased switching costs characteristic of
transaction specific assets ("N). A confirmatory factor analysis
indicated that a single dimension described the TSA construct
adequately (2 = 28.73, df = 5, p = 0.00; GFI = 0.98; CFI = 0.89;
NFI = 0.87). All factor loadings were statistically significant
(p b 0.01) and the composite reliability was 0.60.
Because no relevant scales were available, we developed
new measures of the three content forms of communication
studied here: (1) task-related communication, (2) goal-related
communication, and (3) social communications (see Appendix
A). Because task-related communication and goal-related
communication pertain to business communications between
retailers and supplier reps, we considered these two constructs
to reflect a second-order factor, instrumental communication. A
confirmatory factor analysis supported our second-order
measurement model, one that views communication between
dealers and suppliers as being composed of instrumental
communication as well as social communication (2 = 124.24,
df = 42, p b 0.01; GFI = 0.95; CFI = 0.97; NFI = 0.95). All loadings were large and significant (p b 0.01). The composite
reliabilities were 0.80 and 0.97 for social and instrumental
communication, respectively.
As noted previously, relational governance is reflective of
the relational norms that underlie the dealer's relationship with
its major supplier. In this study, we focus on three characteristics
of strong relational norms: (1) the dealer's trust in the supplier,
(2) the retailer's loyalty to the supplier, and (3) shared values
between the dealer and the major supplier (see Appendix A). A
second-order measurement model (i.e., trust, loyalty, and shared
values as first-order indicators of the second-order factor,
relational governance) fit the data acceptably (2 = 478.63,
df = 87, p b 0.01; GFI = 0.87; CFI = 0.95; NFI = 0.93). All loadings were large and significant (p b 0.01) and the composite
reliability was 0.96.
3.2.2. Control variables
We control for possible sources of systematic bias using two
variables: firm size and dealership tenure. Firm size was
measured as total annual sales in millions of dollars while
dealership tenure was measured by the number of months in
which the dealership has been associated with its major supplier.
We expect both firm size and dealership tenure to be associated
with increased relational governance (Heide & John, 1990; Jap
& Ganesan, 2000; Joshi & Stump, 1999).
3.2.3. Construct validity
We assessed the reliability and construct validity of all of the
constructs through an overall confirmatory measurement model.
Each questionnaire item was set to load only on its respective
latent construct, and all latent constructs were allowed to
correlate with each other. Three second-order constructs
70
(relational governance, instrumental communication, and decision uncertainty) were reflected by their first-order factors,
respectively. The results of this analysis are reported in Table 1.
The measurement model fit the data acceptably (2 =
1788.05, df = 798, p = 0.00; GFI = 0.84, CFI = 0.92, NFI = 0.87).
All factor loadings were statistically significant (p b 0.01) and
Table 1 shows that composite reliability of each construct
measure exceeded the 0.60 threshold (Bagozzi & Yi, 1988).
All cross-construct correlations were significantly (p b 0.05)
less than |1.0|, signifying the discriminant validity of the

construct measures. Overall, these results show that the
measures in this study possess adequate reliability and construct
validity.
4. Analysis and results
We used the following moderated regression model (cf.
Aiken & West, 1991; Jaccard, Turrisi, & Wan, 1990) to test the
Table 1
Construct validity assessment
Construct
Transaction specific asset
TSA1
TSA2
TSA3
TSA4
TSA5
Information adequacy
AQT1
AQT2
AQT3
Prediction of consequence
PDCT1
PDCT2
PDCT3
Confidence in decision
CNFD1
CNFD2
CNFD3
Decision uncertainty c
Prediction of consequence
Social communication
SEM1
SEM2
SEM3
Task-related communication
TSK1
TSK2
TSK3
TSK4
TSK5
Factor loading
Composite
reliability
Construct
0.60
Goal-related communication
GRL1
GRL2
GRL3
Instrumental communication b
Trust
TST1
TST2
TST3
TST4
TST5
Loyalty
LYL1
LYL2
LYL3
LYL4
LYL5
Shared values
SIM1
SIM2
SIM3
SIM4
SIM5
Relational governance c
Trust
Loyalty
Shared values
Control variables:
Firm size
Dealership tenure
0.763
0.885
0.717
0.676
1.000 a
0.87
0.881
1.000 a
0.855
0.85
0.900
1.000 a
0.845
0.87
1.000 a
0.994
0.969
0.82
0.801
1.000 a
0.805
0.80
0.776
1.000 a
0.817
0.78
0.789
0.768
1.000 b
0.943
0.897
Factor loading
Composite
reliability
0.79
1.000 a
0.860
0.894
0.97
0.971
1.000 a
0.853
0.864
0.954
0.885
1.000 a
0.94
0.87
1.000 a
0.899
0.948
0.992
0.979
0.90
0.897
0.893
0.872
0.912
1.000 a
0.96
0.932
1.000 a
0.862
1.000 a
1.000 a
0.85 c
0.85 c
Matrix
1. TSA
2. Decision uncertainty
3. Instrumental communication
4. Social communication
5. Relational governance
6. Firm size
7. Dealership tenure
0.00
0.28
0.12
0.03
0.38
0.14
0.18
0.10
0.31
0.01
0.00
0.50
0.70
0.14
0.00
0.54
0.04
0.01
0.06
0.00
0.24
Goodness-of-fit statistics
2 (798)
GFI
CFI
a
b
c
=1788.05
=0.835
=0.921
RMSEA
NNFI
NFI
=0.054
=0.915
=0.867
Fixed parameter.
Second order factors.
Assumed to be 0.85, and its error term fixed as the product of the indicator variance times 1 minus an assumed reliability of 0.85 (Jreskog & Srbom, 1984).
71
Table 2
Intercorrelations, means, standard deviations, and VIF
Variable
10
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
1.000
0.435
0.230
0.177
0.171
0.090
0.138
0.072
0.121
0.046
4.651
1.198
1.421
1.000
0.051
0.101
0.091
0.061
0.069
0.138
0.057
0.012
3.639
1.386
1.268
1.000
0.001
0.085
0.025
0.014
0.045
0.274
0.211
4.799
1.061
1.240
1.000
0.013
0.046
0.079
0.044
0.004
0.023
3.437
1.024
1.051
1.000
0.334
0.182
0.083
0.134
0.044
.324
1.453
1.219
1.000
0.051
0.114
0.062
0.005
.083
1.698
1.181
1.000
0.407
0.033
0.051
.216
1.398
1.257
1.000
0.019
0.010
.144
1.540
1.224
1.000
0.210
4.04
2.23
1.133
1.000
315.5
212.6
1.078
Instrumental communication
TSA
Uncertainty
TSA Instrumental communication
TSA Social communication
Uncertainty Instrumental communication
Uncertainty Social communication
Firm size
Dealership tenure
Mean
Standard deviation
VIF
hypotheses:
Relational Governance Constant B0 H1 B1 TSA
H2 B2 Uncertainty
H3 B3 Instrumental communication
H4 B4 Social communication
H5 B5 TSA
H6 B6 TSA Social communication
H7 B7 Uncertainty
H8 B8 Uncertainty
Social communication Controls B9 Firm size
B10 Dealership tenure Error Term e:3
The regression model contains four two-way interaction

terms, representing the moderating effects of communication.
To minimize possible multicollinearity, each scale utilized in
constructing an interaction term was mean-centered (Aiken &
West, 1991; Jaccard et al., 1990). As a result of this meancentering procedure, no substantial correlations between the
interaction terms and their components were found. The largest
zero-order correlation is instrumental communication social
communication = 0.44, indicating that only 18.9% of the
variance between the two measures is shared. Table 2 shows
that the largest variance inflation factor (VIF) in the estimated
regression equation is 1.42, which is substantially less than the
critical multicollinearity threshold of 10.0 (Myers, 1990).
Therefore, multicollinearity does not appear to be a significant
issue in this research.
In Table 3, we report the results of the moderated regression
model. The estimated model explains 51% of variation in
relational governance in the supplierretailer channels, an
amount significantly greater than zero (F = 43.58, df = 429,
p b 0.01).
3
On the basis of theoretical reasoning as well as the findings of Anderson
(1985), Joshi and Stump (1999), and Klein et al. (1990), we also examined the
interaction between transaction specific assets and uncertainty by estimating an
expanded version of Eq. (1). In this model, the TSA Uncertainty interaction
term was not statistically significant; note that multicollinearity had a minimal
impact on these results (max. VIF = 1.538).
We advise caution in interpreting the results of Table 3, as the

main effect of each predictor in the moderated regression
model can only be determined by decomposing any significant
interaction (Jaccard et al., 1990). This decomposition involved
partially differentiating Eq. (1) with respect to each predictor in
the model. To analyze each main effect of TSA, uncertainty,
instrumental communication, and social communication, we set
all other variables to their average values (i.e., to zero, because
they have been mean-centered). The results of these tests are
reported in Table 4.
4.1. Main effects
Hypothesis 1 is supported by the results (B1 = 0.099; t =
1.907; p = 0.03). We discovered that, when the dealer faces a
power disadvantage, the more that it invests in TSAs, the less it
perceives relational governance to characterize its relationship
with its major supplier. A similar result was found for the
dealer's decision uncertainty (B2 = 0.290; t = 5.815, p b 0.01).
In other words, dealers are significantly less likely to report
trust, loyalty, or shared values when decision-making uncertainty is higher. This finding supports Hypothesis 2.
The results also corroborate Hypothesis 3. Instrumental
communication boosts relational governance in the dealer
supplier exchange (B3 = 0.652; t = 12.999; p b 0.01). As predicted by Hypothesis 4, social communication also has a
positive effect on relational governance (B4 = 0.274; t = 6.708,
p b 0.01).
4.2. The moderating effect of communication on the
TSAgovernance relationship
In Hypothesis 5, we argue that higher levels of instrumental
communication will attenuate the negative effect of dealer TSA
upon relational governance. The results in Table 3 fail to
support this hypothesis (B5 = 0.052; t = 1.259; p N 0.10).
Hypothesis 6 avers that higher levels of social communication will lessen the negative impact of dealer TSA upon
relational governance. The significant, positive coefficient for
this interaction term (B6 = 0.053; t = 1.477; p = 0.07) marginally
supports our prediction.
72
Table 3
Regression results a
Parameter
B0
B1
B2
B3
B4
B5
B6
B7
B8
B9
B10
a
Variable
(Constant)
TSA
Uncertainty
TSA Instrumental communication
TSA Social communication
Uncertainty Instrumental communication
Uncertainty Social communication
Firm size
Dealership tenure
Parameter estimates
Unstandardized
Standardized
4.888
0.099
0.290
0.652
0.274
0.052
0.053
0.107
0.048
0.002
0.000
0.073
0.204
0.530
0.258
0.048
0.055
0.101
0.050
0.003
0.003
Standard error
One-tailed p-value
0.126
0.052
0.050
0.050
0.041
0.042
0.036
0.041
0.036
0.024
0.000
38.695
1.907
5.815
12.999
6.708
1.259
1.477
2.646
1.318
0.074
0.085
0.000
0.029
0.000
0.000
0.000
0.105
0.070
0.000
0.094
0.471
0.466
R2 = 0.510; F = 43.584, df = 429, p b 0.01.
To fully understand this result, we decomposed the

significant interaction term by comparing the impact of TSA
on relational governance at low, medium, and high levels of
social communication. Following the usual practice in decomposing interaction terms (Aiken & West, 1991; Jaccard et al.,
1990), we set the low level of social communication as one
standard deviation below its mean score, moderate as the mean,
and high as one standard deviation above the mean. Following
Jaccard et al. (1990), we also calculated the standard errors of
these coefficients. The results are reported in Table 4.
Table 4A shows how dealer TSA impacts relational
governance for various levels of social communication. The
TSA-relational governance coefficient, given a low level of
social communication is .172 (p b 0.05). The same coefficient
for a moderate level of social communication is .099
(p b 0.01), and .026 for a high level of social communication
(p N 0.10). Thus, we conclude that increasing levels of social
communication does indeed attenuate the negative impact of
dealer TSA on relational governance.
4.3. The moderating effect of communication on the
uncertaintygovernance relationship
Hypothesis 7 examines the moderating effect of instrumental
communication on the decision uncertainty facing the dealer.
Table 3 indicates that this moderating effect is statistically
significant (B7 = 0.107; t = 2.646; p = 0.00). To determine
whether it supports our hypothesis, we also decomposed this
interaction term (Table 4B). Given a moderate level of social
communication, the results show that with low levels of
instrumental communication, the uncertaintyrelational governance coefficient equals .418 (p b 0.01). With moderate levels
of instrumental communication, that coefficient is .290
(p b 0.01) and is .162 (p b 0.01) with a high level of
instrumental communication. These results clearly indicate
that increasing levels of instrumental communication weaken
the negative impact of reseller's decision uncertainty on
relational governance, thereby supporting Hypothesis 7.
Hypothesis 8 describes the moderating effect of social
communication on the decision uncertainty facing the dealer.
Table 3 shows the relevant interaction term also to be
marginally significant (B8 = 0.048; t = 1.318; p = 0.09). As with

the other significant interaction terms, we decomposed B8 to
determine the exact nature of the moderating effect (Table 4B).
Given a moderate or an average level of instrumental
communication, the uncertaintyrelational governance coefficient becomes less negative as social communication rises from
low ( .357, p b 0.01) to moderate ( .290, p b 0.01) to high
levels ( .223, p b 0.01). Thus, the higher the degree of social
communication, the less the negative impact of dealer decision
uncertainty on relational governance. These results are
consistent with Hypothesis 8.
Neither of the coefficients for the control variables, firm size
and dealership tenure, is statistically significant. This indicates
that neither the size of the dealership nor the length of the
dealership's relationship with its major supplier influences
relational governance in the dealersupplier exchange.
5. Discussion
A dominant framework in the marketing literature is that
managers select relational governance in response to exchange
hazards. We countered this logic and demonstrated that
investments in transaction specific assets are not necessarily
associated with increased relational governance. Where power
is asymmetric, such as in the franchise channel we studied here,
the opposite occurs. Instead of engendering trust, loyalty, and
shared values, the presence of TSAs seems to erode the degree
of relational governance. Similar effects were found for
decision-making uncertainty. Instead of firms getting closer
during periods of uncertainty, they seem to draw back or
retrench, most likely to maintain flexibility.
Communication, be it instrumental or social, has a strong
positive effect on the development of relational norms.
Information sharing provides buyers and their suppliers with
the means for building mutual trust and loyalty and for
developing shared goals, values, and norms.
We further examined whether the level of communication
in the marketing channel is strong enough to mitigate the
negative effects of exchange hazards upon relational governance. The answer is that it issort of. When the dealer is at
a power disadvantage, the level of TSA investment
73
Table 4
Decomposing the moderating effects of intrachannel communication on the relationship between exchange hazards and relational governance
Hypothesis
Estimated
effect on
relational
governance
Standard error
Part A: Moderating effect of communication on the TSAgovernance relationship

H6: Effect of TSA given various levels of social communication (assuming a moderate or an average level of instrumental communication)
Low social communication
0.172
0.077
2.247
b0.05
Moderate social communication
0.099
0.044
2.472
b0.01
High social communication
0.026
0.067
0.380
n.s.
Part B: Moderating effect of communication on uncertaintygovernance relationship
H7: Effect of uncertainty given various levels of instrumental communication (assuming a moderate or an average level of social communication)
Low instrumental communication
0.418
0.072
5.795
b0.01
Moderate instrumental communication
0.290
0.049
5.779
b0.01
High instrumental communication
0.162
0.052
3.124
b0.01
H8: Effect of uncertainty given various levels of social communication (assuming a moderate or an average level of instrumental communication)
Low social communication
0.357
0.071
5.000
b0.01
Moderate social communication
0.290
0.049
5.779
b0.01
High social communication
0.223
0.070
3.171
b0.01
(especially if it is required of the dealer) may be so onerous

that relational governance is adversely affected. In other
words, encouraging or requiring TSA investments may
undermine dealer trust and loyalty as well as erode any
values shared between the channel members. However, the
use of social communication somewhat mitigates the negative
effects of TSA on relational governance. Social communication signals friendship and a level of caring and concern
beyond the task at hand: since friends are not supposed to
rip off one another, requests by equipment manufacturers to
invest in specialized assets are no longer perceived as a threat
(if you don't invest, I'll find another retailer who will).
Instead, the investment is perceived as a necessary part of
doing business collaboratively. Our results also show that
instrumental communication seems to attenuate the negative
effects of TSA on relational governance; but, this moderating
effect is only marginally significant.
Consistent with our model, we further find that the negative
effects of decision-making uncertainty on relational governance
are significantly reduced with increased levels of communication. Increased instrumental communication provides a broader
scope of work-related information, allowing them to adapt to
the marketplace more effectively. This, in turn, appears to offset
the negative impact of decision uncertainty on the degree of
relational governance. Even if the information is not directly
relevant to a specific problem, the sharing of information creates
an exchange climate that fosters the growth of relational
governance. Social communication also mitigates the negative
effects of decision uncertainty. As discussed earlier, and amplified by Granovetter (1985) and Uzzi (1997), friendship, as a
result of social communication, is a form of social tie and is a

powerful origination of relational norms among firms. Becoming friends appears to signal a focus on helping one another, as
opposed to the transaction cost focus of taking advantage of one
another.
5.1. Managerial implications
For suppliers, our results show that increased communication
within marketing channels has positive effects upon the
formation of relational governance. First, suppliers can boost
the level of relational governance through greater task-related,
goal-related, and social communications. More extensive
communications fosters a more favorable climate for relational
governance to flourish. Second, increased channel communications can temper the negative effects of exchange hazards
(namely, transaction specific assets and decision-making
uncertainty) upon relational governance. More extensive communications produces an atmosphere of trust and mutual
understanding, thereby limiting the potential for opportunistic
behavior that arises from investments in transaction specific
assets. Further, heightened communications creates a climate for
better interfirm decision-making as a result of increased
information sharing. This weakens the harmful effect of
decision-making uncertainty upon relational governance.
For their part, dealers can initiate more task-related, goalrelated, and social communications with their suppliers. This
has parallel payoffs for dealers and for suppliers. Where they
have discretion, dealers can avoid investments in transaction
specific assets, which limit the extent of relational governance
74
in channels characterized by power asymmetries favoring

suppliers.
Why the focus upon increasing extent of relational
governance in the marketing channel? The reason is quite
simply that empirical evidence is mounting that relational
governance is positively linked to performance (Cannon,
Achrol, & Gundlach, 2000; Jap, 1999; Johnson, 1999;
Noordewier et al., 1990; Poppo & Zenger, 2002). Clearly,
further research is needed to understand the conditions under
which this finding occurs or may not occur.
5.2. Limitations and future research directions
Additional directions for further research are implicit in the
limitations of this study. In this research, our predictions
(Hypotheses 1 and 2) in terms of the linkage between exchange
hazards and relational governance are built upon power
asymmetry among channel members. Our sample is also
characterized by high downstream dependency (i.e., power
asymmetry in favor of the supplier). Therefore, an important
task of future research is to investigate more diverse samples in
terms of dependency/power symmetry relations to provide an
explicit test of the role of this important variable. A direct
investigation of the interaction effect between power asymmetry and exchange hazards may lead to insightful findings
regarding the flourishing of relational governance. Moreover,
other constructs might also be added into the model. For
example, the role of communication in company-owned vs.
independent channels might be a fruitful topic of investigation.
Building upon Jap and Ganesan (2000), determining how taskrelated, goal-related and social communication varies, if at all,
over the relationship life cycle might be another worthwhile
research endeavor. Further, the role of communication in
international channels where cultural distance plays an
important role would be another valuable topic for future
research. Examining how other dimensions of communication
(e.g., frequency, modality, direction, and influence content)
impact the effects of exchange hazards might also provide
useful dividends for both managers and research.
Another limitation of the paper is rooted in its measures. First,
researchers traditionally regard relational governance as a
multidimensional phenomenon (Heide & John, 1992), but
there is little consensus as to the dimensions that characterize
the construct (Heide & John, 1990, p. 25). While our
conceptualization of relational governance as a second-order
construct that reflects trust, loyalty and shared values appears to be
empirically valid, we acknowledge that some might view these
same dimensions as components of relationship quality (cf.
Dwyer & Oh, 1987; Hibbard, Kumar, & Stern, 2001; Kumar et al.,
1995). Thus, future research that reconciles and integrates these
various perspectives on relational governance is sorely needed.
Second, the theoretical framework of our study operates at the
interorganizational level, as exchange hazards and relational
governance characterize interactions between channel member
firms. However, our data are collected from only one side of the
channel (i.e., the dealer) that reports its perceptions of trust,
loyalty, and shared values. It would be beneficial to have the
suppliers' perceptions of these same constructs. Moreover, our

measure of relational governance examines the channel relationship in terms of the liaison between the dealership's general
manager/owner and the supplier's sales rep. Additional research is
needed to determine if our results generalize to the entire supplier
firm as a frame of reference, not just the supplier's sales rep.
6. Conclusions
Our empirical study of relationships in franchised channels
for farm equipment makes three contributions to channel
governance research. First, it sheds some new light on the
linkage between exchange hazards and relational governance.
In particular, we found that exchange hazards, such as a dealer's
decision-making uncertainty and its investment in transaction
specific assets, can adversely affect its perceptions of relational
governance in channels where it faces a power disadvantage
(i.e., asymmetric interdependence). Second, we found that
instrumental (i.e., task- and goal-related) communication as
well as social communication among channel members plays a
key role in shaping relational governance (i.e., fostering trust
and loyalty among channel members as well as building similar
norms and values). Finally, we discovered that intrachannel
communication can moderate the negative effects of exchange
hazards on relational governance in channels characterized by
asymmetric dependence.
Appendix A. Measures of constructs4
Transaction Specific Assets (TSA)

TSA1
TSA2
TSA3
TSA4
TSA5
Decision uncertainty components

For the following issues, do you
feel you have enough information to
make decisions about your major
supplier's farm equipment?
(R) denotes reverse-coded items.
Our salespeople have spent a lot of

time and effort learning the special
selling techniques used by this
supplier. (Heide & John, 1988)
The procedures and routines we used
to sell farm equipment are tailored for
this supplier.
To market this supplier's products, we
need to carry specialized parts
inventories that we probably couldn't
use for another suppliers. (Klein,
Frazier, & Roth, 1990)
This dealership has invested in
facilities and supplies (computer
system, software, signs, displays,
etc.) for this supplier that couldn't be
used from another supplier.
Our dealership has spent a lot of time
and effort to develop the sales territory
for this particular supplier's lines.
(Heide & John, 1988)

Appendix A (continued)
ANCHORS: information is
always adequate/information is
never adequate
AQT1
AQT2
AQT3
Prediction of consequences
For the following issues, can you
generally predict what will happen
when you make decisions about
your major supplier's farm
equipment?
ANCHORS: can always predict
consequences/can never predict
consequences
PDCT1
PDCT2
PDCT3
For the following issues,
generally how confident are you
about the decision you make
decisions about your major
supplier's farm equipment?
ANCHORS: total confidence/no
confidence
CNFD1
CNFD2
CNFD3
components
TSK1
TSK2
TSK3
TSK4
TSK5
GRL1
GRL2
GRL3
SEM1
SEM2
Appendix A (continued)
SEM3
Farm equipment models to stock

Amount of equipment inventory to
carry
Equipment models to push in sales
strategy
Relational governance components

Trust
TST1
TST2
TST3
TST4
TST5
carry
strategy
Loyalty
LYL1
LYL2
LYL3
LYL4
LYL5

carry
strategy
Shared values
SIM1
SIM2
SIM3
SIM4
The sales rep and I generally talk

about specific jobs that I have to do at
the dealership.
The supplier's rep helps me by giving
me information about the tasks I
perform at my job.
I get task-related information in
discussion with this supplier's sales
rep.
When we meet, we talk about the
tasks and job responsibilities I have to
perform.
I ask my supplier's sales rep for
information about marketing farm
equipment.
I talk to my supplier's rep about the
supplier's plans for this dealership.
We sometimes have discussions
where we focus on goals.
I get information from the supplier's
salesman about how this dealership
fits into the big picture.
The supplier's sales rep and I talk
about our outside (of work) interests.
The supplier's sales rep and I
sometimes have meetings that are
purely social.
(continued on next page)
SIM5
75
The supplier's sales rep and I talk

about things other than farm
equipment or marketing.
I know that this supplier's rep will

deal with us fairly. (Johnson-George
& Swap, 1982)
I can expect my major supplier's rep
to tell me the truth. (Johnson-George
& Swap, 1982)
I trust my major supplier's rep
completely. (Wheeless, 1978)
I know that when this rep promises us
something, he'll come through for us.
I can rely on the supplier's rep to keep
the promises he makes. (Rempel,
Holmes, & Zanna, 1985)
I would like to work with this
supplier's rep for a long time.
If I had a choice, I wouldn't work with
this rep (R).
I would rather stay with this rep than
change to another rep.
I am quite proud to tell others that I
work with this sales rep.
I feel a strong sense of loyalty to this
rep.
My position on running a business is
very compatible with the sales rep's
position.
The supplier's rep and I agree about
how to sell farm equipment.
The sales rep and I think alike about
how to sell farm equipment.
I think that my business values are
similar to the supplier's rep's.
The supplier's rep and I share the
same basic business values.
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Do Exchange Hazards Always Foster Relational Governance An Empirical

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Intern. J.

of Research in Marketing 23 (2006) 63 77

Do exchange hazards always foster relational governance? An empirical

School of Business, Adelphi University, Garden City, NY 11530, USA

firms (Rindfleisch & Heide, 1997). Thus, this logic suggests a

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

the literature that explores the relationship contingencies and

nications. In these ways, we add to what is known about the

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

monitoring techniques, penalties for non-compliance, and

potentially and unfairly reap the benefits of the other firm's

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

bargaining power advantage and, therefore, greater control in

relational governance it perceives in its relationship with its

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

adjust to changes in demand or supply by buying less or buying

it is the glue that holds together a channel of distribution

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

personal interactions with their supplier's current sales rep

CFI = 0.94; NFI = 0.91). All factor loadings were statistically

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

less than |1.0|, signifying the discriminant validity of the

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

The regression model contains four two-way interaction

We advise caution in interpreting the results of Table 3, as the

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

R2 = 0.510; F = 43.584, df = 429, p b 0.01.

To fully understand this result, we decomposed the

marginally significant (B8 = 0.048; t = 1.318; p = 0.09). As with

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

Part A: Moderating effect of communication on the TSAgovernance relationship

(especially if it is required of the dealer) may be so onerous

result of social communication, is a form of social tie and is a

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

in channels characterized by power asymmetries favoring

suppliers' perceptions of these same constructs. Moreover, our

Transaction Specific Assets (TSA)

Decision uncertainty components

(R) denotes reverse-coded items.

Our salespeople have spent a lot of

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

Farm equipment models to stock

Relational governance components

Farm equipment models to stock

The sales rep and I generally talk

The supplier's sales rep and I talk

I know that this supplier's rep will

S. Sheng et al. / Intern. J. of Research in Marketing 23 (2006) 6377

Balabanis, G. (1998). Antecedents of cooperation, conflict and relationship

S. Sheng2>, J.R. Brown / Intern. J. of Research in Marketing 23 (2006) 6377

Skinner, S. J., & Guiltinan, J. P. (1985, Winter). Perceptions of channel control.

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