This study aims to explore how contract design and enforcement influence the effectiveness of contractual governance. In this context, interpretive uncertainty, stemming from differing cognitive frames between parties, is a key factor shaping contractual governance. This study further examines how information technology (IT) capability helps manage this uncertainty by improving transparency and mutual understanding.
Based on regulatory focus theory and information processing theory, this study examines how two types of contract design related to contract ineffectiveness, how interpretive uncertainty moderates these relationships and how IT capability addresses the role of interpretive uncertainty. Ordinary least squares (OLS) is used to test the model based on survey data from 200 Chinese manufacturers.
Results show that behavior-based contract is positively related to contract ineffectiveness, while output-based contract is negatively related to contract ineffectiveness. The effects of both types of contracts are intensified with higher-level interpretive uncertainty. Moreover, results also suggest that IT capability mitigates the moderating role of interpretive uncertainty.
This study contributes to the literature on contractual governance by examining the psychological aspects of contractual governance from the perspective of regulatory focus theory. Additionally, this study contributes to the cognitive perspective of transaction cost economics by verifying the role of interpretive uncertainty in influencing contractual governance and identifying IT capability as an effective method to overcome the negative influence of interpretive uncertainty.
