Manipulating Perceptions of Asset Specificity in Alliances: A Microfoundational Approach

In interfirm exchanges such as alliances and joint ventures, transaction cost economics theory (TCE) argues that asset specificity, a key contracting hazard, largely determines specific attributes of hybrid governance, namely control mechanisms. Despite the importance of this concept, asset specificity is often unobservable. Instead, governance decisions largely rely on negotiator perceptions of asset specificity. While traditional TCE assumes negotiators are intendedly accurate to mitigate transaction costs, they are motivated to manipulate perceptions to maximize value capture for their firm. Thus, theory does not incorporate the impact of manipulated perceptions on governance attributes. Taking a microfoundational approach, we explore the impact of suppliers manipulating buyer managers’ perception of task characteristics to inflate their perceived asset specificity, on hybrid governance attributes. We offer a theoretical framework to predict the direction of asset specificity perception manipulation and when perceptions are most malleable. As a result, we incorporate negotiator cognitions and motives (maximize their firm’s value captured), leading to a more complete understanding of hybrid governance design.