Contracting for circularity: How circular economy clauses shape market and financial performance

The adoption of the circular economy (CE) by manufacturers often requires the cooperation of suppliers and customers to extend circularity processes beyond the company’s confines. Nonetheless, this inter-firm cooperation needs the establishment of governance mechanisms, such as contracts, to facilitate the coordination and control of activities throughout the supply chain. The objective of this article is to analyze the role of contracts, as governance instruments, in the circular performance of companies. Specifically, it analyzes whether the use of contracts with suppliers and business customers incorporating circularity-related clauses (CE contracts) has linear and interactive effects on the market and financial performance of manufacturers implementing CE strategies, and on the efficiency of their circular production practices. To this end, a moderated-mediation analysis was conducted on a sample of 218 Spanish manufacturers. Our findings reveal that the formalization of CE contracts with suppliers or customers enhances the manufacturers’ market and financial performance. Some evidence of an interaction effect of CE contracts with other CE policies has been also found: the greater use of CE contracts makes circular production policies more efficient to improve financial performance.