Safeguarding or coordinating? Unfolding the dual-function of contracts in manufacturer-distributor relationships

Abstract By unfolding the simultaneous presence of the safeguarding function (i.e., contract monitoring) and coordinating function (i.e., joint action) of contracts, the current research operationalizes the dual-function of contracts and ascertains their effects on stimulating interfirm relationships. Analyzing the data collected from 512 manufacturers, we find that, first, contract specificity is positively associated with contract monitoring and joint action. Second, contract monitoring mediates the negative relationship between contract specificity and distributors' opportunistic behavior, while joint action mediates the positive relationship between contract specificity and channel cooperative performance. Third, while joint action directly improves channel performance, contract monitoring does not directly influence channel performance; rather, it promotes channel performance through inhibiting distributors' opportunism. In addition, contract monitoring and joint action substitute for each other in their influence on distributors' opportunism. Overall, we enrich and add insights into the literature on contractual governance by operationalizing the dual-function of contracts and investigating the underlying mechanisms of the dual-function in their influence over different channel outcomes