Appendix 13.1
Empirical review of trust and contracts: substitute versus complements
Complements versus substitutes in business-to-business exchanges
Across companies, large and small, managers often rely on other companies to do work for them. For example, companies that focus on their core, value-added activities typically outsource support functions such as payroll, maintenance, staffing, benefits and IT support. When expanding to new products or geographic markets, managers often form alliances to access skills, knowledge and/or resources that they lack. Geographic distances can also complicate the management of such alliances as supply chains often take on a global footprint. The optimal outcome of such business-to-business (i.e. B2B) transactions is cooperation: having the transaction executed in a manner that meets or exceeds managerial expectations. Yet, how to achieve this is a central debate in strategy research. Should managers rely exclusively on contracts, their trust of another, or both?
Two theoretical perspectives emerged to shape the debate surrounding trust and contracts, transaction cost economics (i.e. TCE) and social embeddedness. In the 1980s, TCE advanced the notion that contracts are necessary to safeguard exchanges from economic self-interest that is routed in opportunistic behaviour – if opportunities exist for one party to take advantage of another for self-gain, then it will (Williamson, 1996). Transaction cost economics assumes that people are self-interested, and if opportunities exist, they will betray one’s trust (Williamson, 1996). Thus, Williamson denies the possibility of positive value derived through knowing the “identity” of parties involved in the B2B exchange.
This TCE position contrasts with that of social embeddedness in which B2B exchanges often take place in a context in which the personal identity of parties matters (Granovetter, 1985. Because economic exchange is embedded in a social structure, the quality of the relationships among economic actors must be considered. If parties “trust” one another to do what is expected or fair, then contracts are not necessary to remedy economic self-interest. Williamson (1996) counters that this type of trust exists only when it is an economically-efficient choice: “A will trust B because it is in A’s interests to do so” (Ring, 1996: 151).
To examine this debate, scholars began to contrast the use of formal control systems to that of relying on relational quality. A substitution perspective advances, if trust exists, then formal controls are simply not necessary. B2B exchanges armed with strong social relationships can rely simply on their trust of the other (Granovetter, 1985; Uzzi, 1997). Others advance an extreme position: the existence of controls will undermine the use or development of trust (Ghosal & Moran, 1996; Inkpen & Currall, 2004). As a result, contracts relate negatively to trust, which implies that trust can function as a substitute for contracts (Sitkin & Roth, 1993): simply put, a substitution perspective means that if trust exists, contracts are not necessary. The primary form of coordination should be trust or contracts, not both.
An alternative to substitutes is a complementary relationship of trust and formal controls: the joint use of formal controls and trust enables greater management of risk, and thus assurance of expected outcomes. Relatedly, the interplay (or interaction) of trust and formal controls reinforces each other such that the delivery of the expected outcomes is greater than that which exists in the absence of their interaction (Sitkin, 1995; Das & Teng, 1998; Poppo & Zenger, 2002; see also Chapter 29 by Long & Weibel, this volume). The dominant logic is that their joint use of both trust and contracts offsets the limits of each one used in isolation. For example, trust allows parties to move forward in situations in which the contract is not well specified; whereas contracts set boundaries which enable a reliance on trust. While the logic underlying substitutes and complements presents alternative predictions, both perspectives share a common agenda: that an exclusive focus on formal controls to deter opportunism is not sufficient to understand governance and the performance of B2B exchanges.
The purpose of this chapter is to review the empirical literature that examines the substitutes-versus-complements debate through the lenses of transaction cost economics and social embeddedness. Because of this theoretical positioning, we limit our conceptual study of trust to that of inter-organizational trust and relational governance, acknowledging that other forms of trust also function as substitutes or complements, and trust and control occur at different levels of analysis (Zucker, 1986; Verburg, Searle, Nienaber, Hartog, Weibel, and Rupp, forth coming). Second, we limit our review to examining one common form of formal control, complete and neoclassical contracts, while acknowledging that other forms of control exist, such as market power, direct supervision and monitoring. Third, consistent with recent meta-analytical reviews regarding the association of trust, contracts and performance (Cao & Lumineau, 2015; Krishnan, Geyskens & Steenkamp, 2015), we examine the overall level of support for three alternative ways in which trust, contracts and/or performance may relate to each other as complements and substitutes. Yet unlike the above review papers, for our review each empirical study must include measures of governance choices, contracts and trust, and ideally include additional factors that increase the likelihood in which self-interest is likely to surface (Schepker, Oh, Martynov & Poppo, 2014). The reason for this requirement is that every business exchange varies in terms of its social and economic characteristics, thus in order to assess the relationship (as substitutes or complements) between trust and contracts, both factors must be considered.
The pattern of results based on our review of this empirical literature suggests that whether trust and contracts function as complements or substitutes depends on the type of contract employed to govern the B2B relationship. For neoclassical contracts, trust supports the development of contracts (as complements) – suggesting that trusted parties appear to see the value of institutionalizing their learning in a contract, so that adaptation and conflict can be more easily and perhaps more fairly addressed in the future. Relatedly, neoclassical contracts support the development of trust, suggesting that working together over time provides a basis for trusting the other party. As a pair or interaction, our analysis further suggests that neoclassical contracts and trust positively relate to performance, a finding consistent with recent meta-analytical reviews (Cao & Lumineau, 2015; Krishnan et al., 2015).
The best way to examine the validity of these alternative positions is to take stock of the empir ical literature that examines both contracts and trust in B2B exchanges, and then code and classify each study on whether their findings support complements or substitutes. Our sample of papers is fine grained and restrictive, for both the search terms of ‘trust’ and ‘contract’ must appear in the abstract. After carefully reading the abstract of an initial sample of 312 peer-reviewed papers, we identified 33 published papers that empirically examine the relationship between trust and contracts in various contexts. Because there is variation in the measurement of contracts and trust, the set of relationships examined relating trust and contracts, and the type of industry that represents the sample, these sources of heterogeneity in each paper are summarized in Appendix 13.1.
An important boundary condition that informs our review of complements versus substitutes is the conceptual distinction that economic risk varies and governance choices become increasingly consequential when risk exists. This assertion is based on prior literature that clearly showcases trust as a willingness to accept vulnerability when risk exists (Rousseau et al., 1998; Bradach & Eccles, 1989): this means parties are willing to rely or depend on another even though there is a chance that the other party may take advantage of them. Risk and vulnerability are also very important concepts in the TCE literature. Williamson (1996) explains that self-interest is more likely to threaten the bilateral execution of a transaction when transaction-specific characteristics exist, and this logic has tremendous empirical validation (see Schepker et al., 2014; Macher & Richman, 2008).
The transaction cost literature clearly specifies the characteristics of transactions that increase the level of risk associated with more complex transactions: volatility in the external environment that can impact demand or supply; difficulty in measuring or observing the actions of the other; and transaction-specific investments and assets (Williamson, 1996). In order to “safeguard” against these risk factors, contracts contain more complex contingencies, specify processes to work out conflict and/or promote adaptation, and may involve shared equity (Schepker et al., 2014; Macher & Richman, 2008). Such highly customized agreements arising from attempts to safeguard or minimize negative outcomes associated with risk factors require significant legal work.
While it is beyond the scope of this review chapter to detail all of this logic, the implication is that classical contracts, which are used as a basis for control in a low-risk environment, are fundamentally different from neo-classical contracts which are used as a basis for control in more high-risk environments. Based on classical contract law, “sharp” transactions require clear agreement and clear performance (Macneil, 1974: 738). Should disputes occur, contract law interprets the contract in a very legalistic way: more formal terms supercede less formal terms should disputes arise between formal and less formal features (e.g. written agreements versus oral amendments), and hard bargaining, to which the rules of contract law are strictly applied, characterizes these transactions.
Contracts that are more complete represent cases in which classical contract law applies: all of the relevant terms and clauses that safeguard parties from risk and set the terms and expectations of trade are easily specified (Williamson, 1996). These contracts are simpler and easier to write, they take up fewer pages, and they are likely to contain relatively standard clauses or boilerplate. Prior work shows that the predominate use of such contracts is for low-risk transactions that can also be considered as standard, common or routine (see Schepeker et al., 2014 for a recent review). In our sample of empirical studies, the survey items that measure such contracts are generally quite consistent and include items that measure the degree to which the roles, responsibilities, performance obligations and sanctions are well specified in the contract.
Neoclassical contracts, in contrast, relieve parties from strict legal enforcement when disputes arise. Perceptive parties reject classical contract law and move into a neoclassical contracting regime because this better facilitates continuity and promotes efficient adaptation (Williamson, 1991: 271–272). Thus, while identity of the parties is known, it is only useful to the extent that bilateral coordination is required to adjust to unexpected changes and disturbances. Thus, neoclassical contracts represent more complex and customized agreements due to heightened risk (Macneil, 1977; Williamson, 1996). When the transaction is more complex and it proves more difficult to specify easily through classical clauses the terms of trade, contracts become nuanced, containing contingencies as well as processes as parties attempt to foresee possible future states, guard against unknown risks and define processes that will be used to resolve conflict and promote adaptation.
Based on contract law, trust represents a qualitatively different governance choice when neo classical contracts exist (e.g. when risk exists) than when classical contracts exist. As a result, we interpret evidence of substitutes or complements as a function of the contract type, and measure empirical support.
A simple example may help describe this qualitative difference: if trust substitutes for a classical contract, it means a manager is willing to rely on trust when there is relatively little economic risk of your “harming” me by failing to deliver the agreed-upon deal. That is, should a supplier betray the buyer, the buyer incurs the cost of one bad deal. After incurring this transaction cost, the manager will replace this supplier with another supplier: the logic for easy replacement is that classical contracts (i.e. “sharp in-sharp out”) characterize competitive markets. Given reputation effects, this supplier will be weeded out of the market (Williamson, 1996; Hill, 1990)
Yet, if trust substitutes for neoclassical contracts, it means that you are willing to rely on trust when there is significant economic risk should one party “harm” the other by failing to deliver the agreed-upon deal. Neoclassical contracts by definition represent transactions in which there is significant bilateral dependency between the two parties (Williamson, 1996). Should one party default prematurely from the agreement, losses accrue in the form of sunk costs, specific investments in labour, equipment or brand-name. Losses further accrue in the form of switching costs because bilateral dependency by definition means that one party cannot easily replace the existing partner in a timely manner (Poppo & Zenger, 1998; Macher & Richman, 2008). In other words, a competitive supply of buyers and sellers does not exist for this type of transaction. Thus, if trust substitutes for a neoclassical contract, it means that parties forgo crafting a more complex contract that puts in place processes to resolve adjustments and disputes (such as coordination and adjustment provisions) as well as legal adjudication. Thus, for trust to substitute for neoclassical contracts, it means that the two parties can readily rely on their trust of each other to adapt as well as resolve disputes, even though risk and economic losses are significant. Thus, substitution implies trust is inherently scalable in terms of the problems it can solve in an ex post manner, and it can produce outcomes that are mutually satisfactory.
Trust implies that managers can rely on the social structure and quality of relationships to promote confidence that the other party will behave as expected (Zucker, 1986): it is “a positive expectation of the intentions or behaviour of another” (Rousseau, Sitkin, Burt & Camerer, 1998: 395). Consistent with this logic, empirical studies validate this focus: trust and its related normative conventions are associated with lower transaction costs (Artz & Brush, 2000; Larson, 1992), greater knowledge transfer (Li, Poppo, & Zhou, 2010; Szulanski, Cappetta, & Jensen, 2004) and better exchange performance in B2B exchanges (Poppo & Zenger, 2002; Zaheer, McEvily, & Perrone, 1998).
In this literature, scholars do not generally distinguish trust, which is being worthy of, from trust worthiness (Weibel, 2007), in which three dimensions figure prominently: ability, benevolence and integrity (Mayer et al., 1995). Trust is defined as “a positive expectation of the intentions or behaviour of another” (Rousseau et al., 1998: 395) and measures qualities that imply the opposite of opportunistic beliefs or self-interested behaviour: (1) positive expectations (i.e. reliability, dependability, predictability, credibility and confidence), (2) integrity (i.e. honesty, fairness, truth), (3) benevolence (i.e. goodwill, genuine concern for the others) (see also Seppanen, Blomqvist & Sundqvist, 2007) and (4) other antecedents/outcomes of trust, such as prior experience, cooperation or activities that require cooperation.
The first empirical paper to examine substitution, Gulati (1995), finds that the number of prior repeated ties weakens the probability that partners rely on shared equity contracts (a.k.a. joint ventures). This result is meaningful because it contrasts with the transaction cost logic that managers are more likely to choose equity-based agreements when there is significant economic risk associated with the exchange (Schepker et al., 2014). While Gulati does not measure trust, he reasons that prior repeated ties act as a proxy for trust, and thus interprets the results as showing that trust can substitute for contracts. Additional early support for substitution comes from Uzzi (1997), who, building on his dissertation advisor’s conceptualization of embeddedness (Granovetter, 1985), finds that a network of apparel firms and their suppliers in New York City did not draft formal contracts to address probable risk factors, but instead relied on their strong personal bonds with one another.
While substitution is one alternative to describe how trust relates to contracts, other alternatives are also possible. In the landmark empirical paper, Poppo and Zenger (2002) examine how contracts and trust function as complements, as an alternative view to substitution. To empirically specify these concepts, they draw upon Macneil’s (1977) observation that for many complex business deals, relational norms are necessary to support the use of contracts. Since complex contracts contain processes for continuance, adjustment and conflict, they represent “incomplete” terms and specifications for conduct that has yet to transpire. This type of contract contrasts with classical contract law in which classical clauses and terms can readily assure that the transaction will be executed as expected. Macneil argues that relational norms enable the effective use and application of customized contracts to foster the execution of the business deal. Poppo and Zenger (2002) measure relational governance as a composite of trust and cooperation, and measure contracts as the degree of customization, representing the conceptual continuum from standard to neoclassical (e.g. neoclassical) contracts. Their results overwhelmingly support the complementary nature of contracts and relational governance – not substitutes. Contracts and relational governance not only function as governance companions, enabling the performance of B2B exchanges, but also support the effective use or development of each other.
Building on Poppo and Zenger (2002), Luo (2002) also examines the complementarity versus substitution of contracts and trust. Yet, Lou uses different constructs and a different set of causal relationships. He advances that prior experience, a proxy for both trust and learning with a partner, not only leads to greater specification of contingencies in joint venture contracts, but in turn, this greater specification of contractual contingencies also leads to greater levels of cooperation. He also finds that the interaction of cooperation and contracts positively strengthens joint venture performance. Overall, his work endorses complementarity of contracts and trust.
As an aggregate, the results of this first set of papers conflict with one another as they provide support consistent with the logic of both complements and substitutes. In the next section, we review empirical work since these landmark papers.
In this section, we review the empirical evidence on complements versus substitutes since the publication of the landmark papers and use a quantitative count of support as a basis for our inferences. While a numerical count measure is crude, we believe it is an appropriate metric given that the sample of papers included in this study represents the highest quality papers available at this time. Also note that because there are different ways in which trust, contracts and/or performance outcomes can relate to each other, we partition our review of complements and substitutes into three sections.
As a temporal process, scholars posit that trusting beliefs form by accumulating experiences and then forming expectations of what to expect from the other (e.g. Blau, 1964; Gulati, 1995; Larson, 1992; Ring & Van De Ven, 1994). Over time, relationships deepen such that a set of values and normative conventions characterize beliefs for how each party will work with the other. Scholars, however, debate how a positive track history of the relationship impacts contracts: (1) as complements in which trust relates positively to the development of contracts, or (2) as substitutes in which trust undermines or substitutes for the use of contracts.
The complement perspective argues that as parties work together they find ways to better specify or work through challenges associated with the optimal execution of the transaction. This conceptualization is consistent with the idea that trust develops through social interaction and task interdependence. Contracts are inherently incomplete and trust facilitates learning as trusted partners work through unexpected challenges. Poppo and Zenger (2002) explain:
as a close relationship is developed and sustained, lessons from the prior period are reflected in revisions of the contract. Exchange experience, patterns of information sharing, and evolving performance measurement and monitoring may all enable greater specificity (and complexity) in contractual provisions
(p. 713).
As parties develop better knowledge of how to execute the transaction, such knowledge becomes formalized and institutionalized in the contract. Consistent with this, empirical work finds that parties over time adjust the formal contract to better specify classical terms and/or procedures that enhance task execution (Mayer & Argyres, 2004). Similar findings from Luo (2002) show that repetitive exchanges breed trust and result in a higher level of specificity and contingency adaptability in their contracts.
The substitution perspective is that trust substitutes for contracts. Gulati (1995: 86) explains: “experience can engender trust among partners, and trust can limit the transaction costs associated with their future alliances…” because “interfirm trust … obliges partners to behave loyally” (p. 92). This predictability, according to Gulati, is functionally equivalent to the predictability created from contractual terms, and forms the basis for which trust substitutes for contracts. He reasons that in order to economize on the transaction costs required from drafting specific contracts managers are more likely to rely on trust, rather than contracts, when forming repeated transactions with the same partner (see Mellewigt, Madhok & Weibel, 2007).
Next we present the empirical evidence based on the following relationships between contracts (two types: classical and neoclassical) and trust (see Table 13.1), and the two alternative relationships. To be included in this table, the paper must empirically specify the main effect of trust on either classical or neoclassical contracts. Note, that in this table we are not measuring the relationship between contracts, trust and outcomes – only whether the authors empirically specify how trust impacts contracts, or how contracts impact trust.
This table indicates that 11 empirical papers examine how trust relates to contracts, and all of these inferences are based on cross-sectional data. Thus, further research is still needed to validate the following remarks.
Table 13.1 Does trust enable better contracts (complements) or does it substitute for contracts?
| Contract type | Empirical support |
|
| # of papers (references) |
||
| Complements | Substitutes | |
|
|
||
| Classical | 3 (Liu, Tao, Li & El-Ansary, 2008; Zhang & Hu, 2011; Bastl, Johnson, Lightfoot & Evans, 2012) | 1 (Woolthius, Hillebrand & Nooteboom, 2005) |
| Neoclassical | 5 (Poppo & Zenger, 2002; Luo, 2002; Blomqvist, Hurmelinna & Seppanen, 2005; Brown, Potoski & Van Slyke, 2007; Mellewigt et al., 2007) | 2 (Gulati, 1995; Mellewigt et al., 2007) |
| Total | 8 | 3 |
Our summary based on a numerical count of the results follows:
The next alternative examines the effect of contracts on the development of trust. Two relationships are possible: as complements, contracts relate positively to the development of trust; as substitutes, contracts undermine the development of trust. The alternative focuses on factors that influence how managers develop their initial assessment of whether they can “trust” the other party. The substitution view is that classical contracts, as a control mechanism, erode a foundation of trust – controls signal a lack of trust and erode positive social relationships (see Poppo & Zenger, 2002: 711). The alternative is that neoclassical contracts are more likely to ensure success and promote long-term business, providing a structure that promotes cooperation, and thus positive social relationships and trust (Poppo & Zenger, 2002). Luo (2002: 907) further endorses this view as contracts represent clear expectations of what the other party needs to achieve. By setting in place a framework that clearly defines each party’s rights, duties and the principles and procedures of cooperation, trust will naturally develop as parties deliver the expected or promised outcomes.
Next we present the empirical evidence.
Table 13.2 Do contracts foster (complement) or undermine (substitute) the development of trust?
| Contract type | Empirical support |
||
| # of papers (references) |
|||
| Complements | Substitutes | Not significant | |
|
|
|||
| Classical | 2 (Woolthius et al., 2005; Ren, Oh & Noh, 2010) | 3 (Malhotra & Murnighan, 2002; Faems, Janssens, Madhok & Van Looy, 2008; Malhotra & Lumineau, 2011) | 1 (Handfield & Bechtel, 2002) |
| Neoclassical | 6 (Poppo & Zenger, 2002; Luo, 2002; Malhotra & Murnighan, 2002; Faems et al., 2008; Malhotra & Lumineau, 2011; Stratling, Wijbenga & Dietz, 2012) | 1 (Stratling et al., 2012) | 0 |
| Total | 8 | 4 | 1 |
Based on Table 13.2 we offer the following summary:
This pattern of results suggests a possible, more nuanced interpretation for how contracts relate to trust. Perceptions of rigid/inflexible/controlling (classical) contracts undermine the development of trust (substitution) while perceptions of flexible (neoclassical) contracts promote the development of trust (complements). This is of theoretical significance given Ghoshal and Moran’s (1996) view that perceptions can undermine trust and/or escalate opportunism.
We illustrate this interpretation with representative studies. Ren et al. (2010) find that classical contracting helps build a fair relationship between retailers and powerful suppliers, thus improving retailers’ trust of suppliers. Yet, when the contract is perceived as controlling, trust is less likely. Malhotra and Murnighan (2002) find that when contracts are not binding, exchange partners might attribute cooperation to personal commitments that result in the development of trust, but when contracts are perceived as binding, trust does not develop. In their case study, Woolthius et al. (2005) also show that when contracts are not interpreted as strict legal safeguards, they promote the development of trust between partners. Faems and colleagues (2008) similarly describe in their case study research that an excessive focus on contracts, specifically the rigid application of controls, can undermine trust, and thus R&D performance; yet when the R&D contract is oriented to be more flexible, partners are more trusting and performance improves.
A third way to assess the complementarity vs. substitution is by investigating the performance effects of trust and contracts. Two alternatives exist. As complements, contracts and trust relate positively to performance. As substitutes, several variants are possible. If trust and contracts are functionally equivalent, their joint use can cancel out the effects of the other (as independent factors) or result in a not significant interaction term. Or if their combined use undermines performance, then a negative interaction effect will be observed. A positive pairing of trust is that trust completes the limitations of contracts due to bounded rationality (Simon, 1957) and minimizes the transaction costs incurred by drafting more complete contracts (Williamson, 1996). Poppo and Zenger (2002) further suggest that contracts and trust offer different functionalities: contracts specify contingencies, processes and controls while the existence of trust fosters mutuality, bilateralism, and continuance (see also, Sitkin, 1995; Das & Teng, 2001). Consistent with this, Blomqvist et al. (2005) document the difficulties in using detailed written contracts to manage inter-organizational collaboration in a dynamic environment. They find that formal contracts, at best, can define ground rules and that trust-based governance guides specific actions for collaboration.
This form of complementarity represents the most common view of trust: it is associated with increased cooperative effort, and as such acts as a “social lubricant”. There are numerous examples of how trust can further cooperation. Because I trust you, I can rely on you to do what you promised, to be fair and/or to take account of my interests when doing work. Because we trust each other, we are willing to share tacit or private knowledge that improves joint performance. Also, when trust exists, parties can act as though the future is more certain, thereby fostering perceptions of stability, bilateral coordination, and limiting performance losses that might otherwise occur when future interaction is less certain. Thus, a central logic underlying complementarity is that trust and contracts address the limitations of each other.
A related form of complementarity examines the interactive effects of trust and contracts, testing whether trust enhances the effects of contracts on performance and vice versa. Specifically, as trust narrows down the scope and severity of exchange hazards, exchange partners are more willing to be flexible and responsive in implementing contractual clauses, which are essential to capture business opportunities in a constantly changing environment. In addition, trust, serving as a social contract, might enhance the enforceability of formal contracts, especially in weak legal systems, both of which increase performance outcomes.
The substitution perspective contends that a joint use of contracts and trust might be redundant, negative or cancel each other out (in terms of an interaction effect) all of which impact the independent effects or interactive effects on performance. Existing empirical studies that develop this logic focus on goodwill trust, a form of relational trust that captures emotional bonds between the two parties. For example, Lui and Ngo (2004) argue that the existence of goodwill trust indicates lower relational risks and thus undermines the effects of contracts to safeguard against opportunism. On the other hand, extensive contracts, as a sign of distrust, might reduce the trust between partners, creating greater motivation for opportunism. Consistent with this logic, Jiang, Li, Gao, Bao and Jiang (2013) find positive interaction effects of goodwill trust and contracts on knowledge leakage.
Next, we present the empirical evidence based on the following relationships between contracts and trust (see Table 13.3), and the two alternative relationships.
Table 13.3 Do contracts and trust function as complements or substitutes in relationship to performance outcomes?
| Contract type | Empirical support |
||
| # of papers (references) |
|||
|
|
Complements |
Substitutes | |
| Independent (main effects of trust and contracts) | Interaction (trust x contracts) | ||
|
|
|||
| Classical | 9 (Cavusgil, Delignonul & Zhang, 2004; Woolthius et al., 2005; Wu, Sinkovics, Cavusgil & Roath, 2007; Lui, 2009; Li et al., 2010; Caniëls, Gelderman & Vermeulen, 2012; Zhao & Wang, 2011; De Reuver & Bouwman, 2012; Jiang et al., 2013) | 5 (Bennett & Robson, 2004; Lui & Ngo, 2004; Wu et al., 2007; Chen, Zhu, Ao & Cai, 2013; Zhang & Zhou, 2013) | 4 (Lui & Ngo, 2004; Jiang et al. 2013; Zhang & Zhou, 2013; Woolthius et al., 2005) |
| Neoclassical | 5 (Poppo & Zenger, 2002; Luo, 2002; Blomqvist et al., 2005; Judge & Dooley, 2006; Zhou & Poppo, 2010) | 1 (Judge & Dooley, 2006) | 0 |
| Total | 13 | 6 | 4 |
Based on this table we summarize:
In this review we examine how the form of contracting, classical versus neoclassical, relates to trust. This focus enriches the results of two recent review papers: (1) Cao and Lumineau’s (2015) meta-analytical analysis of 149 empirical papers, which finds that as complements trust and contracts effectively offset opportunism and improve performance, and (2) Krishnan and her colleagues’ (2015) review of 82 studies, which shows the positive effects of trust and contracts on performance outcomes. We explain how the interpretation of substitution (or complements) is categorically different for each type of contract. For neoclassical contracts, the value of trusting perceptions appears linked to the limits and advantages of neoclassical contracts. Trust fosters better contractual specifications of neoclassical contracts; neoclassical contracts convey expectations that help foster trust; and trust complements neoclassical contracts by promoting adaption, continuance and commitment, which result in greater performance. This summary shows limited support for substitution – that managers will rely exclusively on trust when risk exists.
For classical contracts, the story is not as cohesive. Based on our number count of results, classical contracts do not relate to trust in a consistent fashion. Yet, the joint use of classical contracts and trust results in better performance. The lack of consistent findings make interpreting the mechanism through which trust and classical contracts enable greater performance difficult. Is it because of a social bond? Is it through greater commitment to execution because trusted parties are rewarded with repeat business? Relatedly, is trust simply a perception of reliability – a trusted party – that is capable of better workmanship? More work is clearly needed to clarify this area, which we discuss as a future research opportunity.
In this body of empirical papers (see Appendix 13.1) the items that measure trust relate to perceptions or behaviours that demonstrate a lack of opportunism, or the presence of integrity or ben evolence, two dimensions of trustworthiness. These measures, however, do not tease out the precise mechanism that fosters cooperation or positive outcomes. That is, they do not rule out the possibility that opportunism or economic self-interest exists and accounts for trust. This is an important point because if economic incentives, not social bonds, account for trust, then trust is inherently a fragile concept, for if incentives do not exist to act trustworthily, then parties will renege on their agreement. This is an important gap since the bulk of the evidence suggests that relying on trust should be a best business practice (Cao & Lumineau, 2015; Krishnan et al., 2015). Yet one primary obstacle is that the measurement of trust in this body of literature has not partitioned trust that stems from relational bonds from that of economic self-interest (i.e. it pays to act trustworthily).
Let us give an example. Suppose an empirical study seeks to relate trust to an outcome, such as performance, to demonstrate the positive value of trust in economic exchange. In order to assess this relationship, the research must first identify whether a reliance on trust is risky. Following Rousseau and colleagues (1998: 395): “trust is a psychological state comprising the intention to accept vulnerability based upon positive expectation of the intentions or behaviour of another”. This means that there must be some inherent risk to relying on trust. Rousseau and her colleagues explain: trust “would not be needed if actions could be undertaken with complete certainty and no risk … Uncertainty regarding whether the other intends to and will act appropriately is the source of risk” (1998: 395). Relatedly, the substitution perspective initially assumes that trust is only valuable if there is a lack of information such that if total knowledge of the other partner’s capability and intent is available, trust is not necessary at all (Simmel & Wolff, 1964; McAllister, 1995). Thus, to understand the value of trust in economic exchange, research must specify factors that make it vulnerable to rely on trust. It is the interpretation of trust in a vulnerable context that tests its value in offsetting opportunistic behaviour (see for example Krishnan, Martin & Noorderhaven, 2006; Poppo, Zhou & Zenger, 2008; Krishnan et al., 2015), which the empirical work we viewed does not classically consider.
A second factor that limits the interpretive value of trust is whether the empirical design considers other motivations that influence the decision to trust or the decision to act in a trustworthy fashion. While critically important, this is often lacking in empirical work because incentives or the formal contract may account for the existence of trust. For example, if the contract contains specific performance clauses with strong penalties for non-compliance or incentives for repeat business, then a supplier is motivated to act trustworthily – this conclusion implies that the presence of trust is based on calculation. More formally, a calculation such as the “relentless application of calculative economic reasoning” may underlie a trusting belief or behaviour as parties consider the costs of a breach in trust against the rewards from cooperation (Williamson, 1993: 453). To measure the value of trust that is not based on a motivation for economic gain, the empirical study needs to measure the calculative influences as well as these non-calculative motives (see for example Poppo, Zhou & Li, 2016). According to this conceptual literature, social needs, specifically belonging and identifying with others, endorses a moral integrity or goodwill to realize both organizational and individual goals (Granovetter, 1985; Ring, 1996; Turner, 1987). If this is true, how does this relate to trust? This is clearly a non-calculative origin of trust, but one that current work needs to more carefully measure and examine empirically.
In closing, we suggest the following recommendations for future research:
* We would like to thank the editors, Rosalind H. Searle, Sim B. Sitkin and Ann-Marie I. Nienaber as well as Dave Wangrow, Rekha Krishnan and Fabrice Lumineau for this for their constructive feedback. We also appreciate editorial assistance from Suzanna Emelio.
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