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 b College of Business and Economics, West Virginia University, Morgantown, WV 26506-6025, USA c 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 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., interorga- nizational structures and behavior modes) that promote coordination and deter conflict, punitive action, and opportu- nistic behaviors. Many channel relationships blend “market” and “hierarchy” elements and exist as hybrid forms (William- son, 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 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 account—contingencies 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 Intern. J. of Research in Marketing 23 (2006) 63 – 77 www.elsevier.com/locate/ijresmar ⁎ 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