Trust, Opportunism and Governance: A Process and Control Model

Abstract

In this paper a process and control model is developed for the analysis and design of inter-firm relations, in which both opportunism and trust play a role. Its aim is to develop a tool for the analysis, diagnosis and design of inter-firm partnerships. It takes into account the value of the partner, relative to alternat ives, and the risk of the relation. Risk depends on the incentives that the partner may have towards opportunism, his opportunities for opportunism and his 'pro pensity' towards opportunism. The latter is related to trust. A partner's incent ives towards opportunism depend on the uniqueness of the value that he offers, on one's own switching costs and on the partner's dependence on the relation. The underlying theory employs both transaction cost economics and social exchange theory. On the basis of the model, values and risks can be balanced in different ways: there are adversarial strategies that jeopardize value, and cooperative strategies that build value. The model can be used to explore viable sequences of strategies of governance, depending on different conditions. As an illustration, it is used for an analysis of ways to initiate a relation.