Economic, Business and Marketing Perspectives

Trust in the Economic Context

Trust is considered to be a crucial element in many economic activities that potentially can involve opportunistic behaviours disturbing the relationship between the business partners. In general, the main focus of economic research is the creation of institutions and incentives that are able to minimize the anxiety and uncertainty which are typically related with economic transactions (Williamson, 1993). Economic transactions can be regarded as a specialized kind of interpersonal behaviour. Most contributions in economic research seem to be especially influenced by Williamson’s (1974) terminology and typically use the terms “principal” and “agent” to refer to the interaction partners. Normally, these are individuals, but also economic exchange between groups or with firms are in the focus of the research contributions. This literature string represents a considerable expansion of the trust (or better distrust) concept - as economic exchange theory typically investigates the concept from its negative or “dark” side. This view is mostly attributable to one of the basic assumptions of transaction cost theory; here, it is argued that the agent is always striving to maximize his/her own welfare. Therefore, the risk of opportunistic behaviour is always high and the agent can actually never be trusted. Williamson (1985, p. 47) refers to opportunism as “self-interest seeking with guile”. According to the author, people are not opportunistic per se but they are able and often likely to show such behaviours. Consequently, firms (i.e., principals) face an overwhelming difficulty and task to identify trustworthy agents. As a consequence, firms have to structure themselves (and make their decisions) as if all agents cannot be trusted. In such an environment, for firms it is a basic necessity to negotiate and supervise detailed contracts in order to protect themselves against opportunistic behaviour. These contracts and controls represent substitutes of trust. Williamson states that hierarchies and markets both breed transaction costs and that the differences in the costs of contracts versus the costs of controls finally determine the strategic options of the firm (Hosmer, 1995). Another author, Hill (1990), also recognizes that firms are not able to identify economic actors in the market that are cooperative or opportunistic. However, the scholar advances the perspective that the reputation of an agent can be used as a meaningful selection mechanism to identify those who are more likely to cooperate. This can as a consequence reduce transaction costs. Reputation is, of course, the result of trustworthy behaviour. Hill never explicitly defines the concept of trust. Nevertheless, in line with his work, one can derive a conceptualization of trust as the economically rational decision to hold close to the promises given in the contract and to do exactly that what others expect. A departure from this principle will otherwise cause an eventual loss in one’s reputation and, as a consequence, fewer contracting opportunities in future (Hosmer, 1995). Bromiley and Cummings (1992), on the other hand, make the explicit claim that trust reduces transaction costs and also propose a specific definition of trust, as they write, “trust is the expectation that another individual or group will (1) make a good faith effort to behave in accordance with any commitments, both explicit or implicit; (2) be honest whatever negotiations preceded those commitments; and (3) not take excessive advantage of others even when the opportunity (to renegotiate) is available”. Therefore, the authors implicitly describe trust as one’s assessment of others’ goodwill and reliability, while not using the exact terms. These scholars further state that trust not only reduces the costs of monitoring the agent’s performance but also eliminates the need for implementing additional control mechanisms that are bonded with short-term financial results of the firm. Bradach and Eccles (1989) argue that markets as well as hierarchies are not the only ways to govern economic transactions, but in addition price, authority, and (most notably) trust are alternatives and represent independent methods which can be combined in a variety of ways. For these scholars, trust does not replace the market or the hierarchy completely, but can be regarded as a critical complement. In accordance with Gambetta (1988, p. 217), they define trust as the “probability that one economic actor will make decisions and take actions that will be beneficial or at least not detrimental to another” and state that in such conditions cooperation would be a more valid strategy than competition”. In contrast to Hill, Bramiley and Cummings, and Gambetta, the authors, however, differ in that they view social norms and interpersonal relationships as the sources of trust, rather than rational considerations of self-interest (Hosmer, 1995). While in economic research, precise definitions of trust are missing, this literature string makes a valuable contribution to the explanation of the role of trust as a governance mechanism in economic relationships. Additionally, there often exists an obvious overlap in the conceptualization of the concepts between economic and especially social psychology contributions in cases where the former approaches have decided to define trust in their own discipline. But also the understanding of trust as a specific kind of behaviour regularly surfaces.