Mapping the Landscape of Transactions: The Governance of Business Relations in Latin America

Abstract

To what extent do firms use trust, law, and third-parties to ensure fulfillment of agreements to transact? How do they combine these mechanisms to form transactional governance structures? How do answers to these questions vary across countries? Generating the relevant data requires constructing a survey question answerable by any firm, anywhere. The question is administered in six South American countries. Applied to the resultant data, latent class analysis (LCA) estimates classes that correspond to the transactional governance structures that firms employ to support implementation of agreements. Without imposing an a priori model, LCA discovers meaningful governance structures. Bilateralism appears in all governance structures. Law is never used alone. Bilateralism and formal institutions are sometimes complements, never substitutes. Within-country regional variation in the use of bilateralism and law exceeds cross-country variation. LCA provides the posterior probabilities that each firm uses each governance structure, facilitating testing hypotheses consequent on Williamson's discriminating-alignment agenda.