Inter-Organizational Networks: The Cost of Establishing Trust

In a business climate characterized by increasing integration, alliances, partnerships, and exchanges, cooperation among organizations is a central aspect of management. This is especially true for inter-organizational network relationships, which cannot function effectively without cooperation. Trust is often described as an essential factor in decisions to enter into, or forgo, cooperative relationships. Management theories consistently suggest that organizations engaging in cooperative network relationships must cultivate trust in order to succeed. While sometimes acknowledging that cooperation can and does occur in the absence of trust, these theories use the expected benefits of trust-based approaches to cooperation---particularly reduced transaction costs---as justification for the argument that trust is necessary to achieve efficient cooperative outcomes. Substantial research on antecedent factors leading to organizational trust describe ways that organizations can develop and maintain trust, rebuild trust after betrayal, or compensate for distrust, but relatively little research focuses on the costs organizations incur when pursuing these courses of action. The presence of trust in inter-organizational relationships may enable more efficient exchanges. In multi-party relationships where the parties do not have common interests or where they have insufficient knowledge about each other to enable trust-based decisions to cooperate, organizations need alternative approaches. This dissertation reports the results of a systematic review of research on the sources and magnitude of the costs of trust-based and control-based cooperative strategies and presents a logical model to assess levels of trust in inter-organizational network relationships to and evaluate alternative approaches to achieving cooperative behavior. The evidence resulting from the systematic review supports the proposition that organizations can achieve cooperation using trust-based and control-based strategies. The costs of developing trust sufficient to lead to cooperation are sometimes higher than the cost to develop contracts or other controls that substitute for trust. In long-term relationships, however, the reduction in transaction costs resulting from trust justifies the initial investment in building trust. The evidence also suggests that where distrust or absence of trust characterizes inter-organizational relationships, trust-based approaches alone are insufficient to produce successful outcomes, making control-based strategies more feasible and more cost-effective than trust-based alternatives.