Formal contracts are often held to be undermining a firm?s capacity to develop relational governance and may signal distrust of your exchange partner and by undermining trust encourage, rather than discourage, opportunistic behavior (Fehr and Gachter, 2000). Poppo et al (2002) also argue in support of the opinion that formal contracts actually undermine trust and encourage the opportunistic behavior which they are designed to discourage. These critiques of formal contracts view relational governance as a substitute for formal contracts. In the presence of relational governance, they hold that formal contracts are at best an unnecessary expense and at worst counter-productive and that relational exchange arrangements supported by trust are commonly viewed as substitutes for complex contracts in inter-organizational exchanges.

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