Trustworthiness as a Source of Competitive Advantage

Topics: Economics, Morality, Transaction cost Pages: 33 (11224 words) Published: February 6, 2011
Strategic Management Journal, Vol. 15, 175-1 90 (I 994)

Fisher College of Business, The Ohio State University, Columbus, Ohio, U.S.A.

College of Business Administration, Texas A & M University, College Station, Texas, U.S.A.

Three types of trust in economic exchanges are identified: weak form trust, semi-strong form trust, and strong form trust. It is shown that weak form trust can only be a source of competitive advantage when competitors invest in unnecessary and expensive governance mechanisms. Semi-strong form trust can be a source of competitive advantage when competitors have differential exchange governance skills and abilities, and when these skills and abilities are costly to imitate. The conditions under which strong form trust can be a source of competitive advantage are also identified. Implications of this analysis for theoretical and empirical work in strategic management are discussed.

Significant differences in assumption and method incorrect (since most exchange partners are, in exist between behaviorally oriented and economi- fact, trustworthy), socially inefficient (since it cally oriented organizational scholars leads to an overinvestment in unnecessary (Donaldson, 1990; Barney, 1990). While these governance), and morally bankrupt (Etzioni, differences manifest themselves in a wide variety 1988). A more reasonable approach, it is argued, of research contexts, no where are they more would adopt the assumption that most exchange obvious than in research on the role of trust in partners are trustworthy, that they behave as economic exchanges. stewards over the resources they have under On the one hand, behaviorally oriented their control (Donaldson and Davis, 1991), and researchers often criticize economic models that thus that trust in exchange relationships-even assume exchange partners are inherently untrust- without legal and contractual governance worthy (Mahoney, Huff, and Huff, 1993) and protections-will be common. constantly tempted to behave in opportunistic On the other hand, more economically oriented ways (Donaldson, 1990). These scholars are scholars respond by observing that, at the very dissatisfied with economic analyses that suggest least, it is difficult to distinguish between exchange trust will only emerge in an exchange when parties partners that are actually trustworthy and those to that exchange erect legal and contractual that only claim to be trustworthy (Arrow, 1974; protections (called governance mechanisms) Williamson, 1985). Since one cannot reliably which make it in their self-interest to behave in distinguish between these types of exchange a trustworthy manner (Williamson, 1975). This partners, legal and contractual protections are a rational, calculative, economic approach to trust, rational and effective means of assuring efficient many behavioral scholars argue, is empirically exchange. Trust, many economists would argue, is in fact common in exchange relationships, precisely because of the constant threat of Key words: Trust, competitive advantage, resourcebased view of the firm, organizational economics, opportunistic behavior, linked with governance (Hill, 1990). Behavioral assertions that most transaction cost economics CCC 0143-2095194/100175-16 @ 1994 by John Wiley & Sons, Ltd.


J.B. Barney and M. . Hansen H
Numerous definitions of trust and trustworthiness have been presented in the literature (Bradach and Eccles, 1989; Gambetta, 1988; Lewicki and Bunker, 1994). For purposes of this discussion, Sabel’s (1993: 1133) definition of trust has been adopted: trust is the mutual confidence that no party to an exchange will exploit another’s vulnerabilities. Parties to an exchange can be vulnerable in several different ways. For example, when parties to an exchange find it very costly to evaluate accurately the quality of the...
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