Dealing with the Paradox of Embeddedness: The Role of Contracts and Trust in Facilitating Movement Out of Committed Relationships

56 Pages Posted: 5 Dec 2002

See all articles by Sérgio G. Lazzarini

Sérgio G. Lazzarini

Insper Institute of Education and Research

Gary J. Miller

Washington University in St. Louis - Department of Political Science

Todd Zenger

University of Utah

Date Written: October 2006

Abstract

When there are constantly new, valuable opportunities to transact with alternative partners — a situation we refer to as exchange value uncertainty — long-term or committed transactions among the same individuals are discouraged. But when opportunism creates exchange hazards, which escalate in non-recurring transactions, individuals will be reluctant to take full advantage of the gains from switching to more valuable partners, thereby leading to "overembedded" exchanges. Two mechanisms may encourage movement out of committed relationships in those conditions. First, formal contracts should serve as a safeguard to market participants, in the sense that they limit potential losses due to opportunistic behavior. Second, trust in general others (as opposed to trust in familiar people) reduces participants' perception of hazards in market exchanges and hence promotes transactions among strangers. By increasing the propensity to initiate new exchanges, general trust also diminishes the role of contracts in causing movement out of committed relationships. In this paper, we present experimental evidence largely consistent with this theory of the interplay between formal and informal mechanisms in the determination of social mobility.

Keywords: Commitment, cooperation, social exchange, contracts, trust, embeddedness

JEL Classification: C7, C9, L14, Z13

Suggested Citation

Lazzarini, Sérgio Giovanetti and Miller, Gary J. and Zenger, Todd R., Dealing with the Paradox of Embeddedness: The Role of Contracts and Trust in Facilitating Movement Out of Committed Relationships (October 2006). Available at SSRN: https://ssrn.com/abstract=332622 or http://dx.doi.org/10.2139/ssrn.332622

Sérgio Giovanetti Lazzarini (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil
55-11-45042387 (Phone)

HOME PAGE: http://www.sergiolazzarini.insper.edu.br/indexelazza.html

Gary J. Miller

Washington University in St. Louis - Department of Political Science ( email )

One Brookings Drive
Campus Box 1063
St. Louis, MO 63130
United States
314-935-5874 (Phone)
314-935-5856 (Fax)

Todd R. Zenger

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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