10.5465/AMBPP.2019.126 HOW THE NETWORK NEIGHBORHOOD INFLUENCES PARTNERSHIPS: FROM HANDSHALES TO FORMAL COLLABORATION AMONG U.S. FIRE DEPARTMENTS JAY R. HORWITZ University of Toronto 105 St. George Street, Toronto ON, Canada M5S 3E6 BILL McEVILY University of Toronto ANITA M. McGAHAN University of Toronto ABSTRACT We contribute to integration of network theory and contract theory. Theoretically, we examine the implications of the “network neighborhood” for a dyad’s contractual relationship. By testing our claims on agreements between U.S. Fire Departments, we find that the network neighborhood significantly influences the way that partners work together. THEORY The choice between informal agreements and formal contracts is of central interest in both relational contact theory (Baker, Gibbons and Murphy 2002, 2008) and network theory (Ahuja, Soda and Zaheer 2012; Gulati 1995a, 1995b). Nevertheless, these theories offer largely independent explanations for governance choice and evolution. Whereas relational contract theory primarily emphasizes facets within the focal relationship, network theory principally features partners’ connections outside the relationship. The potential for insights accruing from the integration of relational contracting theory and network theory is extensive. This potential arises in part from conceptual commonalities. Interestingly, social information features prominently in both theories. For relational contract theory, the viability of self-enforcing agreements is due to the learning, trust, and norms of equity that emerge in repeated and continuing relationships. For network theory, who collaborates with whom is based on the repository of private information, reputations, and opportunities that reside within the ongoing web of social relationships. Despite these commonalities, relatively little scholarly work has integrated relational contract theory and network theory, leaving unaddressed a number of critical questions about the evolution of governance from informal agreements to formal contracts. In particular, although it argues for the importance of social enforcement mechanisms (Greif 1993; Macneil 1974, 1978), relational contract theory has yet to consider fully how the partners’ networks of ties influence the contract written between the partners. A neighborhood of ties around a pair of contracting partners may be mutual to both parties and/or exclusive to one, thereby creating quite different social structures affecting the flow of information, obligations, and pressure on the focal relationship. In the analysis below, we formalize the concept of the network neighborhood, and define this structure of outside ties as one of its two main characteristics. Accordingly, the first primary research question of this paper is: How important is the structure of the network