Strategic performance effects of misaligned formal contracting: The mediating role of relational contracting

• Firms experience significant losses due to misaligned formal contracting.
• Misalignment matters more for end-product enhancements than for cost reductions.
• Relational contracting mediates the negative performance effects of misaligned formal contracting.

Studies show that failing to align formal contracts with transaction attributes reduces relationship performance. However, few studies consider either how the effects of misalignment differ across outcome types or the mechanisms through which misalignment affects performance. This study examines the effects of misaligned formal contracting on two types of outcomes, i.e., end-product enhancements and cost reductions, and on one mechanism through which misalignment affects performance, i.e., relational contracting. Using survey data from 305 buyer–supplier relationships in the Scandinavian wood industry, the findings suggest that (1) misalignment has a significantly stronger negative effect on end-product enhancements than on cost reductions, and (2) relational contracts mediate the effect of misaligned formal contracting on performance. Firms in the sample experience significant misalignment-related losses of 10.3% and 5.3% in end-product enhancements and cost reductions, respectively. The findings suggest that misalignment is particularly harmful to performance outcomes that rely on relational contracting, such as end-product enhancements.