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This chapter addresses social embeddedness effects on ex ante management of economic transactions. We focus on dyadic embeddedness, that is the history of prior transactions between business partners and the anticipation of future transactions. Ex ante management through, for example, contractual arrangements is costly but mitigates risks associated with the transaction, such as risks from strategic and opportunistic behavior. Dyadic embeddedness can reduce such risks and, hence, the need for ex ante management by, for instance, making reciprocity and conditional cooperation feasible. The chapter presents a novel theoretical model generating dyadic embeddedness effects, together with effects of transaction characteristics and management costs. We stress the interaction of the history of prior transactions and expectations of future business. Hypotheses are tested using new and primary data from an extensive survey of more than 900 purchases of information technology (IT) products (hard- and software) by almost 800 small- and medium-sized enterprises (SMEs). Results support, in particular, the hypotheses on effects of dyadic embeddedness.

This introductory chapter places the contributions in this volume in the larger picture of research on governance in markets and organizations and highlights the structure of the volume. We argue that including embeddedness arguments in a model for purposive behavior is a fruitful way to extend theoretical work on governance that allows for consistent derivation of hypotheses. We hope that this theoretical focus combined with “empirical pluralism” induces a cumulative body of evidence in the new economic sociology.

This chapter examines the factors that may influence the total value created in a joint venture (JV) and also the relative value appropriated by each partner in the venture. We look at the effects of both partners’ embeddedness in prior networks of relationships and the asymmetry of business relatedness of two partners with the JV on these two important outcomes. Results of an event study of stock market reaction to JV announcements by the largest U.S. firms during 1987–1996 suggest that both network embeddedness of partners and the asymmetry of business relatedness of two firms with the JV affect the total value creation of all partners but not the relative value appropriation between the partners.

This chapter addresses how firms buying information technology (IT) products select their suppliers. We argue that social embeddedness, in the sense of own experiences with suppliers and information about experiences of third parties, influences these types of selection decisions. More specifically, we claim that social embeddedness is more important if: (1) the potential damage for the buyer from receiving an inferior product is larger and (2) if it is more difficult for the buyer to monitor the quality of the product. We use large-scale surveys of IT transactions in the Netherlands and Germany to test these hypotheses. In general, our hypotheses about the effects of social embeddedness on partner selection are supported. We find that buyers tend to assign greater weight to product quality if the potential damage for the buyer is larger. Negative third-party information is particularly important if the buyer has large problems to monitor the quality of a product.

Assuming that information about the participants in the network circulates over the ties comprising it, firms’ structural positions – defined in this chapter by their location in the network of past strategic collaborations – should affect their general reputations as collaborators and the knowledge that structurally proximate organizations possess about their past behavior. In turn, the information benefits associated with different network positions should influence the types of governance structures and contractual features that appear in new alliances. This chapter examines how the positions of biotechnology firms in the established network of strategic alliances influences one of the important contractual terms of new partnerships: whether or not one partner finances the activities of its counterparty as part of the deal.

Rational choice theory has numerous implications for the analysis of organizational governance structures. This chapter reviews some of these applications. The main emphasis is on relational contracting. It will be argued that repeated games theory, that is, a variant of rational choice that deals with rational agents who repeatedly interact, can explain the outcomes of relational contracting. There is some controversy about the merits of rational choice explanations. Can they deal with inefficient structures and their (alleged) stability, with path dependence and mimetic processes? Many of these issues have been addressed by new sociological institutionalists. It is argued that rational choice analysis is in fact consistent with many of these observations. There is, in other words, some convergence between rational choice and institutionalist approaches.

In this chapter, we show how embedded social relations affect economic transactions and intraprofessional stratification in the market for legal services. We argue that networks are critical in fostering individual upward mobility not only because they provide valuable information to ego (lawyer) but also because they function as a crucial mechanism by which the focal actor’s (lawyer’s) status is transmitted to outside alters (clients). Consistent with Podolny’s (1993) general theoretical statement, we claim that ties to prestigious network partners send positive signals concerning the ability and trustworthiness of legal professionals. That is, networks help reduce the information asymmetries faced by potential buyers concerning the actual (unknowable) quality of legal services. Our argument is that, in doing so, the network-embedded status of lawyers serves to contribute to their earnings. We demonstrate this point empirically by examining how networks relate to the process of income attainment among a random sample of lawyers in Chicago (1995).

The literature on job networks predicts that employees referred through networks would be better matched and mentored and thus would have lower turnover. However, existing research on this question has neglected the ways in which network effects are contingent upon firm organization. Using the personnel records of a large retail bank, we examine the relationship between network recruitment and turnover among new employees. There was no significant difference between network referrals and non-referrals, but referrals eligible for the employee referral program did have lower turnover. These results are explicable in light of the bank’s organization.

This study stresses the importance of considering a “joint” governance of interfirm relations as an alternative to external governance (by the State) and self-governance (by the business community) of these relations. We argue that a broadly-conceived structural and organizational approach to economic institutions provides insights into this joint governance because it shows how such a system spreads the costs of control among several kinds of stakeholders. We look at how transactions between any two firms are regulated through jurisdiction by “consular” judges (i.e. judges elected through the local Chamber of Commerce) who indirectly represent other firms and industries in that market, and are therefore considered to be at the same time third parties and potential levers of influence acting on behalf of corporate interests. We study an empirical case of such joint governance: The Tribunal of Commerce of Paris (TCP). Following previous work on lateral control and leverage, we hypothesize that industries and/or companies that have a strong stake in the conflict resolution process will be more represented among the judges of this court than other industries and/or companies, and that judges who are socially active in the court that enforces this joint governance will be sought out for advice more than other judges, and thus gain influence on their peers by suggesting specific outcomes. The analyses of the composition of the bench and of the advice network data collected in this court display an influence structure that confirms these hypotheses and that is likely to affect conflict resolution between businesses. It thus characterizes joint governance of markets as a complex set of social processes worthy of economic sociologists’ attention.

This paper discusses two mechanisms through which social embeddedness can affect trust among actors in cooperative relations. Trust can be based on past experiences with a partner or trust can be built on possibilities for sanctioning an untrustworthy trustee through own or third-party sanctions. These two mechanisms are labeled learning and control. The mechanisms are often left implicit or discussed in isolation in earlier research. Learning and control can operate at different levels: at the dyadic level and at the network level. We argue that for understanding trust the two mechanisms should be studied simultaneously, theoretically as well as empirically. We show that this is more easily said than done by addressing some of the theoretical as well as empirical issues. We offer preliminary evidence of the simultaneous working of the learning and control mechanisms at the dyadic level and the network level.