Managers’ dispositions toward formal contracts: A cross-country examination

Abstract

This study integrates institutional and dispositional theories to develop a multilevel model predicting that managers’ endorsement of formal contracts increases with the quality of formal institutions. This effect is contingent upon managerial dispositions of ethical idealism and interpersonal trust, which provide a morally driven override of uncertainty and a substitute source of certainty in business practices, respectively. We test our arguments on hand-collected data from 3,652 manager-negotiators in 16 countries. We find that managers endorse formal contracts when they are embedded in contexts with high quality contract enforcement institutions, but this effect diminishes substantially among ethically idealistic managers. These results suggest that an understanding of managers’ reliance on formal contracts requires multilevel theory informed by how managerial dispositions interact with the formal institutional context.