While trust is the mutual confidence that one’s vulnerabilities will not be exploited in an exchange, different types of trust can exist in different eco- nomic exchanges. These different types of trust depend on different reasons parties to an exchange can have the confidence that their vulnerabilities will not be exploited. At least three types of trust can be identified: weak form trust, semi-strong form trust, and strong form trust.
1. WEAK FORM TRUST: LIMITED OPPORTUNITIES FOR OPPORTUNISM
One reason that exchange partners can have the mutual confidence that others will not exploit their vulnerabilities is that they have no significant vulnerabilities, at least in a particular exchange. If there are no vulnerabil- ities, from adverse selection, moral hazard, holdup, or other sources, then the trustworthiness of exchange partners will be high, and trust will be the norm in the exchange.
This type of trust can be called weak form trust because its existence does not depend on the creation of contractual or other forms of exchange governance. Nor does its existence depend on commitments by parties to an exchange to trustworthy standards of behavior. Rather, trust emerges in this type of exchange because there are limited opportunities for oppor- tunism. Parties to an exchange, in this weak form context, will gain all the benefits of being able to trust their exchange partners without substantial governance or other costs.
Of course, weak form trust is likely to emerge in only very specific kinds of exchanges, that is, exchanges where there are limited vulnerabil- ities. In general, whenever the quality of goods or services that are being exchanged can be evaluated at low cost, and whenever exchange partners do not need to make transaction-specific investments to obtain gains from an exchange, vulnerabilities in that exchange will be limited, and weak form trust will be common. Easy-to-evaluate quality effectively eliminates adverse selection and moral hazard vulnerabilities; no transaction-specific investments effectively eliminate holdup vulnerabilities. Without vulnera- bilities, opportunistic behavior is unlikely, and weak form trustworthiness will exist.
In this sense, weak form trust is clearly endogenous, that is, it emerges out of a very specific exchange structure. Of course, this exchange structure can change and evolve over time. If an exchange evolves such that the cost of evaluating the quality of the goods or services in an exchange increases, then adverse selection and/or moral hazard vulnerabilities may emerge, making weak form trust no longer possible. Also, if transaction-specific investments develop over time in an exchange, then holdup vulnerabilities may emerge, and weak form trust will no longer exist.
Given this analysis, an important question becomes: how often will weak form trustworthiness exist? While, ultimately, this is an empirical question, it seems likely that weak form trust will be the norm in highly competitive commodity markets (Williamson 1975). Examples of such markets include the market for crude oil and the market for soybeans. In all these markets, it is relatively easy for buyers and sellers to evaluate the quality of the goods or services they are receiving. Moreover, in all these markets, there are large numbers of equally qualified buyers and sellers. Thus, firms do not have to make transaction-specific investments to trade with any one firm. Since parties to exchanges in these kinds of markets are not subject to significant exchange vulnerabilities, weak form trustworthiness is usually the norm.
Of course, that a market was once a highly competitive commodity mar- ket does not mean that it will always be a highly competitive commodity market. The cost of evaluating the quality of goods or services can increase, the number of buyers or suppliers can fall, and significant exchange vul- nerabilities can develop. In this new exchange context, exchange partners cannot rely on the emergence of weak form trust, though other types of trust may develop.
2. SEMI-STRONG TRUST: TRUST THROUGH GOVERNANCE
When significant exchange vulnerabilities exist (due to adverse selection, moral hazard, holdup, or other sources), trust can still emerge, if parties to an exchange are protected through various governance devices. Gov- ernance devices impose costs of various kinds on parties to an exchange that behave opportunistically. If the appropriate governance devices are in place, the cost of opportunistic behavior will be greater than its benefit, and it will be in the rational self-interest of exchange partners to behave in a trustworthy way (Hill 1990). In this context, parties to an exchange will have the mutual confidence that their vulnerabilities will not be exploited because it would be irrational to do so. This type of trust can be called semi-strong trust, and is the type of trust emphasized in most economic models of exchange (Hill 1990).
A wide range of governance devices have been described in the litera- ture. Economists have tended to focus on market-based and contractual governance devices. One market-based governance device is the market for reputations (Klein, Crawford, and Alchian 1978). Firms or individu- als that develop a reputation for behaving opportunistically will often be excluded from future economic exchanges where exchange vulnerabilities are significant. The cost of these opportunities forgone can be substan- tial, and the avoidance of these costs can lead exchange partners to be trustworthy in current exchanges, albeit in a semi-strong way. Examples of more contractual forms of governance include complete contingent claims contracts, sequential contracting, strategic alliances, and hierarchical gov- ernance (Williamson 1985; Hennart 1988; Kogut 1988). Contractual gover- nance devices explicitly define what constitutes opportunistic behavior in a particular exchange, and specify the economic costs that will be imposed on offending parties (Williamson 1979).
This economic focus on market-based and contractual governance devices has been criticized as being badly under-socialized (Granovetter 1985). Several authors have suggested that a variety of social costs can also be imposed on exchange partners that behave in opportunistic ways. For example, a firm that gains a reputation as a ‘cheater’ may bear substantial economic opportunity costs (Klein, Crawford, and Alchian 1978), but it may also lose its social legitimacy (DiMaggio and Powell 1983). Also, Granovetter (1985) has argued that exchange partners, be they individuals or firms, that are deeply embedded in social networks put those networks of relations at risk when they engage in opportunistic behavior. The impo- sition of these social costs also acts to reduce the threat of opportunistic behavior.
One implication of including governance devices that impose social costs on opportunistic exchange partners, instead of just economic costs, is the expectation that opportunistic behavior will be unusual, even in settings where few market-based or contractual governance devices are in place, as long as these more social forms of governance exist (Granovetter 1985). Even some economists are beginning to recognize the importance of these more socially-oriented forms of governance. However, while this more social approach to governance broadens the range of governance devices that should be studied, the trust that emerges among parties to an exchange with these social governance mechanisms in place is of the same type as the trust that emerges with only economic governance devices in place. In both cases, trust emerges because rational actors find it in their self-interest, for both economic and social reasons, to not behave opportunistically. Put another way, neither economic nor behavioral schol- ars would generally predict the emergence of trust in exchanges where significant vulnerabilities exist, and in which there are no market-based, contractual, or social forms of governance.2 With governance in place, however, trust—of the semi-strong variety—may emerge, despite the exis- tence of significant exchange vulnerabilities.
Like weak form trust, semi-strong trust is endogenous, that is, it emerges out of the structure of a particular exchange. However, unlike weak form trust, the structure of that exchange is modified, in the semi-strong case, through the use of governance devices of various types. If parties to an exchange create and/or exploit the correct governance devices, then oppor- tunistic behavior in that exchange will be unlikely, and trust—albeit of the semi-strong variety—will exist.
Of course, the creation and exploitation of different forms of governance are not costless. The costs of market-based and contractual forms of gover- nance are well documented (Williamson 1985). While social forms of gov- ernance have fewer direct costs associated with them, they are nevertheless costly, in the sense that the use of these forms of governance requires one to only engage in exchanges where potential partners are embedded in specific broader social networks of relations. This limitation on potential exchange partners is an opportunity cost of using social forms of governance.
Traditional transactions cost logic suggests that rational economic actors will insist on just that level of governance necessary to ensure the semi- strong trustworthiness of exchange partners. If existing social forms of governance cannot assure the emergence of semi-strong trustworthiness, then additional, and costly, legalistic and contractual forms of governance (including, perhaps, contingent claims contracts and sequential contact- ing) will need to be created. If this level of governance is not sufficient, then even more costly hierarchical forms of governance may be erected (Williamson 1975, 1979). There may even be some exchanges where hierarchical governance is not sufficient to create semi-strong form trust (Grossman and Hart 1986).
One implication of this form of analysis is that there may be some potentially valuable exchanges that cannot be pursued. Whenever the cost of governance needed to generate semi-strong trust is greater than the expected gains from trade, an exchange with semi-strong trustworthy part- ners will not be pursued. This can happen in at least two ways. First, the expected gains from trade may be relatively small, in which case even mod- est investments in governance mechanisms may not pay off. Second, the expected gains from trade may be very large, but so may be the exchange vulnerabilities in that trade. In this type of exchange, the high cost of governance may still be greater than the expected value of exchange, even if that expected value is large. Indeed, as Grossman and Hart (1986) suggest, there may be some exchanges where no governance devices will create semi-strong trust (i.e. where the cost of governance is infinitely high). If the only types of trust that can exist in economic exchanges are of the weak and semi-strong types, then these valuable, but costly to govern, exchanges may have to remain unexploited.
3. STRONG FORM TRUST: HARD-CORE TRUSTWORTHINESS
In weak form trust, trust is possible because exchange vulnerabilities do not exist. In the semi-strong case, trust is possible, despite exchange vul- nerabilities, because of the significant social and economic governance mechanisms on the opportunistic behavior of exchange partners. In strong form trust, trust emerges in the face of significant exchange vulnerabil- ities, independent of whether elaborate social and economic governance mechanisms exist, because opportunistic behavior would violate values, principles, and standards of behavior that have been internalized by parties to an exchange.
Strong form trust could also be called principled trust, since trust- worthy behavior emerges in response to sets of principles and standards that guide the behavior of exchange partners. Frank (1988) might call strong form trust ‘hard-core trust’. Hard-core trustworthy exchange part- ners are trustworthy, independent of whether exchange vulnerabilities exist and independent of whether governance mechanisms exist. Rather, hard-core trustworthy exchange partners are trustworthy because that is who, or what, they are. This type of trust is, perhaps, closest to the type of trust emphasized by behavioral scholars (Mahoney, Huff, and Huff 1993).3
In this sense, strong form trustworthiness is clearly exogenous to a par- ticular exchange structure. Strong form trust does not emerge from the structure of an exchange, but rather, reflects the values, principles, and standards that partners bring to an exchange. Those values, principles, and standards may reflect an exchange partner’s unique history, its culture, or the personal beliefs and values of critical individuals associated with it (Barney 1986b; Arthur 1989; Dierickx and Cool 1989).
The strong form trustworthiness of individuals
While the existence of strong form trustworthiness is, ultimately, an empir- ical question, research from a variety of disciplines can be helpful in answering the existence question. If exchange partners are individuals, then research in developmental psychology suggests that strong form trustwor- thiness can exist in at least some people.
Developmental psychologists have studied the stages of moral develop- ment in children and young adults (Kohlberg 1969, 1971). These stages are summarized in Table 5.1.4 When children are very young (small babies), they are able to make very few, if any, moral choices. In this stage, decision- making and behavior is essentially amoral. However, as children mature, they often have to decide whether to conform their choices and behaviors to a set of values, principles, and standards.5 In the conventional morality stage (Kohlberg 1969), children conform their choices and behaviors to a set of values, principles, and standards in order to avoid the costs imposed on them by others for failing to do so. In this stage, children are moral because the costs of being caught violating principles and standards (i.e. punishment) are too high. In the postconventional morality stage, choices and behaviors conform to a set of values, principles, and standards because they are internalized by individuals. While external costs could still be imposed on choices and behaviors that do not conform to these principles and standards, avoiding these costs is not the primary motivation for moral behavior. Rather, the primary motivation for such behavior is to avoid internally imposed costs, including a sense of personal failure, guilt, and so forth.
Table 5.1. Parallels between stages of moral development and types of trust
Some obvious parallels exist between the types of trust and trustwor- thiness identified here, and the stages of moral development identified in developmental psychology. These parallels are identified in Table 5.1. The amoral stage in the moral development literature is analogous to weak form trustworthiness. Just as young children cannot violate moral stan- dards when they are unable to make moral choices, individuals in exchange relationships cannot act opportunistically when there are no opportunities to do so. Conventional morality is analogous to semi-strong trustwor- thiness. In conventional morality, individuals make choices to conform their behavior to a set of principles and standards in order to avoid the cost of failing to do so; in semi-strong trust, opportunistic behavior is avoided because of the economic and social costs imposed on such behav- ior by governance mechanisms. Finally, postconventional morality is anal- ogous to strong form trustworthiness. In both cases, choices and behavior conform to a set of principles and standards because those principles and standards have been internalized. While external costs may be imposed on individuals who violate these principles and standards, avoiding these external costs is not the primary reason choices and behavior conform to them. Rather, the avoidance of internally imposed costs—including a sense of personal failure and guilt—provide the primary motivation for this type of principled behavior.
Psychologists have shown that postconventional morality is not uncom- mon (Kohlberg 1971). While some people never mature beyond the amoral or conventional morality stages, many have sets of values, principles, and standards that they use to guide their choices and behaviors. In order for postconventional morality to lead to strong form trustworthiness, all that is additionally required is that some of these values, principles, and standards suggest that exploiting an exchange partner’s vulnerabilities is inappropriate.
The strong form trustworthiness of firms
At the individual level, the existence of strong form trustworthiness in at least some people seems plausible. However, that individuals—as exchange partners—can be strong form trustworthy does not necessarily imply that firms—as exchange partners—can be strong form trustworthy. Firms, as exchange partners, can be strong form trustworthy for at least two rea- sons. Either a firm may possess a culture and associated control systems that reward strong form trustworthy behavior, or the specific individuals involved in a particular exchange may, themselves, be strong form trust- worthy.
Zucker (1987) has shown that firm founders can have a very strong impact on the culture and other institutional attributes of firms. This impact can continue, even if these individuals have been dead for many years. Others, besides founders can also have strong cultural and institu- tional effects. For example, transformational leaders (Tichy and Devanna 1986) can have the effect of recreating a firm’s culture and fundamentally changing other of its attributes.
If these and other influential individuals were themselves strong form trustworthy, they may have created an organizational culture character- ized by strong form trustworthy values and beliefs. These strong form trustworthy values and beliefs may also be supported and reinforced by internal reward and compensation systems, together with decision-making mechanisms that reflect strong form trustworthy standards. A firm with these cultural and institutional mechanisms in place will often behave in a strong form trustworthy manner in exchange relationships.
Note that if a firm has a strong form trustworthy culture and associated control mechanisms, it is not necessary for each individual in a firm to be strong form trustworthy. Rather, all that is required is that individuals in a firm be at least self-interested in their behavior. In this situation, individuals in a firm will find it in their self-interest to behave in a strong form trustworthy way when representing the firm, for failure to do so would lead them to be subject to a variety of social and economic sanctions. Individuals who are unable to conform themselves to a firm’s strong form trustworthy standards have several options, including, for example, finding positions in the firm where trustworthiness issues are not likely to arise or changing firms.
Of course, that a firm once had a culture, and associated internal control mechanisms, that encouraged strong form trustworthiness does not mean that it will always have these attributes. Cultures can evolve, control mech- anisms can change, and a firm may no longer have the attributes to qualify for strong form trustworthiness. However, even when firms do not have strong form trustworthiness cultures, it may still be possible for some of the exchanges in which a firm engages to be characterized by strong form trust.
Exchanges between firms are, more often than not, actually exchanges between small groups of individuals in different firms. For example, when an automobile company signs a supply agreement with a supplier, the two groups of individuals most directly involved in this agreement are the purchasing people, in the automobile company, and the sales peo- ple, in the supply company. When two firms agree to form an equity joint venture, several groups of people are directly involved, including those in each parent firm that are assigned the responsibility to inter- act with the joint venture, and those that work in the joint venture itself.
While the firms in these exchanges may not have strong form trust- worthy cultures, the specific individuals who are most directly involved in these exchanges may, themselves, be strong form trustworthy. Exchanges between strong form trustworthy individuals in different firms can lead to strong form trust, even though the firms, themselves, may not be strong form trustworthy.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.