Trust and Formal Contracts in Interorganizational Relationships - Substitutes and Complements

Abstract

We hypothesize that trust is a moderator of the direct relationship between control and coordination concerns and the extent of contracting. Our results suggest that high trust weakens the positive relationship between control concerns and the extent of contracting, but reinforces the positive relationship between coordination concerns and the extent of contracting. In other words, trust functions at one and the same time as a substitute for contracting (regarding control concerns) as well as a complement of contracting (regarding coordination concerns). By highlighting the dual role of contracts (i.e. a controlling and coordinating function) and the moderating role of trust in this regard, our paper provides a new focus to the current discussion on the relationship between trust and contracts (i.e. substitutes or complements), one that may help reconcile some divergent perspectives in the literature.

Keywords: Trust, contracts, governance, alliances, transaction costs, resource based view

JEL Classification: D23, L14, L20