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Tie Dissolution in Market Networks: A Theory of Vicarious Performance Feedback

Managers need to periodically evaluate any exchange partner to decide whether to continue or dissolve the exchange tie, but doing so can be challenging because of causal ambiguity: it can be difficult to attribute organizational performance to any specific underlying factor. One way managers may evaluate their exchange partners is by observing the performance trajectories of competitors who rely on the same exchange partners. We propose a theory of vicarious performance feedback and test it in the context of Formula One motor racing. We find that a firm building a Formula One racing car is more likely to end an exchange relationship with an engine supplier after that supplier’s other customers experience an episode of poor performance relative to their historic track record. In line with an attention-based view of the firm, this behavior occurs when the firm’s own performance is below its aspiration level. This work extends our understanding of how managers use vicarious learning to supplement their direct experience when evaluating their exchange partners, expands our thinking about network dynamics by showing how network neighbors’ experiences can influence tie decisions made within a dyad, and contributes to the cognitive foundations of problemistic search by showing how external information is integrated into managers’ responses to their own firm’s underperformance.