Market Uncertainty and the Social Character of Economic Exchange

The author is indebted to Bill Barnett, Jim Baron, Jon Bendor, Beth Benjamin, Michael Hannan, Pamela Haunschild, Marshall Meyer, Jeffrey Pfeffer, Werner Raub, Toby Stuart, and three anonymous ASQ referees for comments on earlier versions of this document. The author is also thankful for numerous suggestions made by seminar participants at the University of Utrecht, the University of Munich, and INSEAD. Generous financial support was provided by the Fletcher Jones Foundation and the Stanford Graduate School of Business's Financial Service Research Initiative. This paper proposes that organizations overcome problems of market uncertainty by adopting a principle of exclusivity in selecting exchange partners. This general proposition in turn implies two specific hypotheses. First, the greater the market uncertainty, the more that organizations engage in exchange relations with those with whom they have transacted in the past. Second, the greater the uncertainty, the more that organizations engage in transactions with those of similar status. A study of investment banking relationships in the investment grade and non-investment-grade debt markets from 1981 to 1987 provides support for the hypotheses. The implications of this analysis for stratification and concentration in the market are discussed.'