Trust and its alternatives

Introduction

The study of the impact of trust on interor-ganizational relations has interested organi-zational scholars for some time (Arrow, 1974;March & Simon, 1958; Mayer, Davis, &Schoorman, 1995; Rousseau, Sitkin, Burt, &Camerer, 1998). Most of this work recog-nizes trust as an important part of nonmarketforms of exchange governance betweenfirms. This work also suggests that, all thingsbeing equal, firms that trust each other areable to more efficiently and effectively man-age their relationships than firms that do nottrust each other (Zaheer, McEvily, & Per-rone, 1998). In this sense, trust is one of aset of governance devices that firms canuse to manage their nonmarket exchanges

with other firms (Barney & Hansen, 1994;Williamson, 1975, 1985).

However, that trust is one of these gov-ernance devices does not suggest that it isthe only such device, nor even the most im-portant of these devices. Indeed, few schol-ars argue that trust, by itself, will be suffi-cient to protect a firm from all the types ofopportunism that might emerge in an ex-change (Hill, 1990; Williamson, 1993).Thus, trust will usually be part of an interre-lated bundle of governance devices thatfirms erect to ensure the efficient and effec-tive management of their economic transac-tions with other firms.

While many authors agree with thisbundle-of-governance-devices approach tounderstanding how exchanges between firms

TRUST AND ITS ALTERNATIVES

Human Resource Management, Winter 2003, Vol. 42, No. 4, Pp. 393–404© 2004 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com).DOI: 10.1002/hrm.10097

Sharon A. Alvarez, Jay B. Barney, and Douglas A. Bosse

Most scholarly work on trust recognizes its importance as part of a nonmarket form of gover-nance in exchanges between firms. However, trust is only one such governance device that canbe used; other devices such as reputation, bargaining power, and contracts can also be used togovern exchanges. This article empirically examines the relationships between trust, reputation,bargaining power, and contracts as governance devices in agreements between smaller entre-preneurial firms and larger, more established firms. The findings suggest that while the role oftrust is an important one, it may be more effective when combined with other governance de-vices. © 2004 Wiley Periodicals, Inc.

Correspondence to: Sharon A. Alvarez, Jay B. Barney, Douglas A. Bosse, Ohio State University, Fisher Col-lege of Business, 2100 Neil Avenue, Suite 860, Columbus, OH 43206, [email protected], [email protected], [email protected]

394 • HUMAN RESOURCE MANAGEMENT, Winter 2003

are managed, the explicit relationships andtrade-offs among these different governancedevices have received limited empirical exam-ination. Some of these governance devicesmay be independent of each other, some maybe complements, some may be substitutes,and so forth. The purpose of this article is toexamine the relationship between trust andother governance devices firms use to man-age their exchanges with other firms. In theprocess, the relationships among these othergovernance devices will also be examined.The result will be a new understanding aboutwhich governance devices tend to be used to-gether and which ones do not.

Exchange Governance and GovernanceMechanisms

The most influential theory of exchange gov-ernance in the economics and organizationsliterature is transactions-cost economics(Williamson, 1975, 1985). This theory sug-gests that the primary motivation for erectingexchange governance is for firms to protectthemselves from the threat of opportunism.In this sense, alternative governance devicescan be seen as alternative ways to reduce thethreat of opportunism in an exchange.

Initially, transactions-cost theory distin-guished only between markets and hierarchiesas forms of governance (Williamson, 1975).Over the years, however, this simple typologyhas been expanded to include a wide array of“intermediate” forms of governance—gover-nance that is not quite market or hierarchy,but instead possesses some attributes of boththese extremes (Hagedoorn, 1993; Parkhe,1993; Williamson, 1985). However, even thischaracterization of governance has proven tobe inadequate in describing the full range ofgovernance options now available to firms.

Rather then being restricted to assigningrelationships between firms to two, three, or asmall number of nominal governance cate-gories, a more flexible approach to analyzinggovernance exists. This approach recognizesthat most transactions are managed throughbundles of governance devices, each of whichmay be designed to address the problems ofopportunism in a different way. In this con-text, describing the relationship between firms

becomes an effort to describe the differentgovernance devices that firms use to managethreats of opportunism in their relationship.

A wide variety of these governance de-vices have been identified in the literature.One of the most important of these devices istrust. While different scholars often developtheir own unique definitions of trust, thesedefinitions often have a great deal in com-mon. Consider, for example, the followingdefinitions of trust. Rousseau, et al. (1998,p. 395) define trust as “a psychological statecomprising the intention to accept vulnera-bility based upon the positive expectations ofthe intentions and behaviors of another.”Sabel (1993, p. 1133) defines trust as “a mu-tual confidence that parties to an exchangewill not exploit the other’s vulnerabilities.”Mayer et al. (1995, p. 712) define trust as“the willingness of a party to be vulnerable tothe actions of another party based on the ex-pectation that the other party will perform aparticular action important to the trustor, ir-respective of the ability to monitor or controlthat other party.”

These definitions all focus on the roleof vulnerability, whether it is at the individ-ual, group, or organization level, within so-cial interactions as an important determi-nant of the level of trust in an exchange.Indeed, a “willingness to be vulnerable”seems to be a part of most contemporarydefinitions of trust (Rousseau et al., 1998).Mishra (1996) goes so far as to suggest thatin the absence of vulnerability, the conceptof trust is not necessary.

Thus, to the extent that parties to an ex-change that are vulnerable trust each other,they can proceed in that exchange withmuch less concern for threats of oppor-tunism (Gulati, 1995; Ring & Van De Ven,1992). In this sense, trust helps “solve” theproblem of opportunism in an exchange(Lewicki, McAllister, & Bies, 1998; Shep-pard & Sherman, 1998).

Perhaps the most common governancedevice in these types of exchanges—certainlymore common than the use of trust—is theuse of a formal contract (Deeds & Hill,1998). Contracts help address the problemof opportunism by specifying the rights andresponsibilities of all parties in an exchange,

... a “willing-ness to bevulnerable”seems to be apart of mostcontemporarydefinitions of trust.

Trust and Its Alternatives • 395

... firms willonly engage inexchanges thatbenefit them.

how those rights and responsibilities willchange as the exchange evolves, and how vi-olations of the agreed-upon terms of the con-tract will be managed (Williamson, 1985).

In principle, if a contract anticipates allfuture states in an exchange, identifies allrights and responsibilities in those futurestates, and is costless to write and enforce,then contracts can perfectly solve oppor-tunism problems in an exchange. Of course,no contracts can meet these criteria andthus must usually be supported by othergovernance devices. For example, some havesuggested that trust in an exchange is im-portant precisely in those areas of a rela-tionship where contracts either cannot bewritten or are costly to enforce (Donaldson,1990; Etzioni, 1988).

Reliance on information about anotherfirm’s reputation can also be used as a gover-nance device to manage the threat of oppor-tunism in an exchange. Whereas trust andcontracts manage the threat of opportunismafter an exchange between firms has begun,reputation manages the threat of oppor-tunism before that exchange begins (Barney& Hansen, 1994; Hill, 1990). Forming a re-lationship with a firm that has a reputationfor not behaving opportunistically will re-quire a very different bundle of governancedevices than forming a relationship with afirm that has a reputation for opportunisticbehavior. It may be possible to rely on trustas a governance device in the relationshipwith the first firm, while contracts may be amore important part of the governance thatis erected in the second relationship.

Yet another check on the opportunisticbehavior of exchange partners is the ability toleave an exchange (Gambetta, 1988; Klein,Crawford, & Alchian, 1978). Exchangesemerge between firms because of mutualgains from trade. Absent fiat, firms will onlyengage in exchanges that benefit them. How-ever, in some exchanges, some parties maybenefit more than others. Those that benefitthe least from an exchange can abandon anexchange at low cost if they perceive an ex-change evolving in ways that are inconsistentwith their interests (Tirole, 1988). Firms thathave the ability to leave an exchange whenthe threat of opportunism in that exchange

emerges have significant bargaining power inthat exchange (Bacharach & Lawler, 1984).

In this sense, bargaining power in atransaction can be thought of as a gover-nance device that reduces the threat of op-portunism in an exchange. Firms with bar-gaining power in an exchange, for example,may have to rely less on trust to avoid threatsof opportunism. Rather, these firms can usethe threat of leaving an exchange early to dis-courage the opportunistic actions of otherfirms in that exchange.

Relationships among Governance Devices

Trust, contracts, reputation, and bargainingpower—as governance devices—can be inde-pendent, complements, substitutes, or alter-natives. Two governance devices are inde-pendent when the extent to which one isused to manage an exchange does not influ-ence the extent to which the other is used tomanage that exchange. Independence isdemonstrated when two governance devicesare not correlated. For example, if firms usecontracts to manage their economic ex-changes regardless of the extent to whichthose exchanges are characterized by trust,then contracts and trust are independentgovernance devices.

Two governance devices are comple-ments when their joint impact on exchangeoutcomes is positive, over and above any in-dependent impact these devices have on theoutcome of that exchange. Thus, comple-ments are reflected by a positive interactioneffect. For example, if relying on trust andbargaining power simultaneously in manag-ing an exchange benefits a firm over andabove the impacts of relying on trust and bar-gaining power separately, then trust and bar-gaining power are complementary gover-nance devices.

Two governance devices are substituteswhen their joint impact on exchange out-comes is negative, over and above any in-dependent impact these devices have onthe outcome of that exchange. Accordingly,substitutes are indicated by a negative in-teraction effect. For example, if relying ontrust and reputation simultaneously inmanaging an exchange reduces the benefits


a firm gains from an exchange, over andabove the independent effects of trust andreputation on those outcomes, trust andreputation are substitutes. In general, gov-ernance devices will be substitutes whenthey address the same governance prob-lems in about the same way. In this setting,increasing investment in one or another ofthese devices can create positive gover-nance outcomes. However, investing inboth of these devices simultaneously willgenerally increase the cost of managing anexchange without a commensurate in-crease in exchange benefits. This, ofcourse, has the effect of reducing the netbenefits associated with an exchange.

Finally, two governance devices are alter-natives when the extent to which one is usedto manage an exchange has a significant in-fluence on the extent to which the other isused to manage that exchange. Alternativesare statistically redundant; neither gover-nance device provides additional predictiveability beyond the other. For example, if firmsthat use trust to manage their economic ex-changes never use bargaining power to man-age their exchanges, and vice versa, then thesetwo governance devices are alternatives.1

Hypotheses

The analyses presented in this article assumethat firms choose that mix of governance de-vices that maximizes their performance in aparticular exchange. In other words, firms de-cide what role trust will play in managing theirrelationship with another firm, what role con-tracts will play in managing this relationship,what role obtaining information about theother firm’s reputation will play, and so forth,in an effort to maximize their performance inthis exchange. For this reason, the first hy-potheses concerning these governance de-vices deal with the extent of their use relatedto the alliance performance as perceived byone of the firms in a particular exchange.

Hypothesis 1a: The extent to which trust isused to manage an exchange is related tothe performance of that exchange as per-ceived by the firm using this governancedevice in that exchange.

Hypothesis 1b: The extent to which con-tracts are used to manage an exchange isrelated to the performance of that ex-change as perceived by the firm using thisgovernance device in that exchange.

Hypothesis 1c: The extent to which reputa-tion is used to manage an exchange is re-lated to the performance of that exchangeas perceived by the firm using this gover-nance device in that exchange.

Hypothesis 1d: The extent to which bargain-ing power is used to manage an exchange isrelated to the performance of that exchangeas perceived by the firm using this gover-nance device in that exchange.

These hypotheses suggest, first, that trust,contracts, reputation, and bargaining powerare all governance devices, and second, thatgovernance devices can have an impact onthe benefits that firms perceive from ex-changes.

The relationship between the extent towhich a firm uses governance devices tomanage an exchange and that firm’s per-ceived performance in that exchange alsomakes it possible to examine the trade-offsthat firms make among these different gov-ernance devices. This can be done by ex-amining how the impact of these gover-nance devices on perceived allianceperformance varies when they are or arenot considered as part of the bundle of gov-ernance devices firms use to manage a par-ticular relationship.

Little prior theory exists about whetherthe governance devices identified in this ar-ticle are likely to be independent, comple-ments, substitutes, or alternatives. How-ever, it is possible to develop somehypotheses about these relationships. First,prior work seems to suggest that formalcontracts are a very widely used form ofgovernance (Barney & Hesterly, 1996). Inparticular, it often appears to be the casethat formal contracts are used as a gover-nance device regardless of which other gov-ernance devices might be used to managean exchange. This suggests the followinghypotheses:

... firms decidewhat role trustwill play inmanaging theirrelationshipwith anotherfirm, what role contractswill play inmanaging thisrelationship,what roleobtaininginformationabout the other firm’sreputation will play, and so forth...


... acquiringinformationabout repu-tation facili-tates the use of trust...

Hypothesis 2a: The use of formal contractsto manage an exchange is independent ofthe use of trust to manage this exchange.

Hypothesis 2b: The use of formal contracts tomanage an exchange is independent of theuse of reputation to manage this exchange.

Hypothesis 2c: The use of formal contractsto manage an exchange is independent ofthe use of bargaining power to managethis exchange.

Second, the remaining governance de-vices examined here (trust, reputation, andbargaining power) seem to fall into two cate-gories: those that address opportunism prob-lems by relying on information about theother firm that is involved in an exchange(trust and reputation) and those that solvethese problems by relying on informationabout themselves (bargaining power).

All things being equal, it seems likelythat these first two governance devices (trustand reputation) will likely be either comple-ments or substitutes, since they address theproblem of opportunism using similar kindsof information. To the extent that acquiringinformation about reputation facilitates theuse of trust as a governance device, and viceversa, these devices could be complements.However, to the extent that these devices relyon exactly the same information to resolvethreats of opportunism, they may be substi-tutes. This leads to the following:

Hypothesis 3: Trust and reputation arecomplementary or substitute governancedevices.

This same logic seems to suggest thatbargaining power will be either independentor an alternative to trust and reputation asgovernance devices:

Hypothesis 4a: As a governance mecha-nism, bargaining power is independent oran alternative to trust.

Hypothesis 4b: As a governance mecha-nism, bargaining power is independent oran alternative to reputation.

Methodology

Sample and Data

Data to examine these hypotheses were col-lected from individuals in a sample of entre-preneurial firms who have the responsibilityof managing relationships between thesefirms and their large-firm alliance partners.By definition, this is a group of firms thathas already concluded that important gainsfrom trade are possible by forming a rela-tionship with a particular large firm. More-over, these firms have also already decidedto manage these relationships through aform of intermediate governance, a strategicalliance. However, as was suggested earlier,that these firms have all chosen a strategicalliance as a governance mechanism doesnot necessarily mean that important attri-butes of the relationships between thesefirms do not vary. Indeed, the extent towhich trust, reputations, and bargainingpower act as governance devices in thesefirms does vary significantly.

The governance relationship betweenentrepreneurial and large firms is an appro-priate setting for testing the hypotheses foranother reason. Previous research has indi-cated that these relationships are subject tosignificant threats of opportunism, and thatopportunism often adversely affects the per-formance of the entrepreneurial firm (Al-varez & Barney, 2001). This effect of al-liances on firm performance is stronger forsmall firms than large firms (Sarkar, Echam-badi, & Harrison, 2001). In this setting, de-cisions about how to govern its relationshipswith its large-firm partners may have an im-portant impact on the long-term perfor-mance, and even survival, of these entrepre-neurial firms. This should make therelationship and trade-offs among these gov-ernance devices easier to identify.

As most of the independent variables re-quired to test the hypotheses are perceptualin nature, a survey was used to collect therequired data. The survey was sent to entre-preneurial firms in three industries:biotechnology, telecommunication soft-ware, and oil and gas. These industries varyin the extent to which alliances are used to


manage relationships between large and en-trepreneurial firms. Such alliances are verycommon in biotechnology (Fisher, 1996;Hagedoorn, 1993, 1995), somewhat com-mon in the oil and gas industry (Reamer,1997), and somewhat less common in thetelecommunications software industry(Raphael, 1998), although alliances are re-portedly becoming more common in theselast two industries.

Industry directories were used to iden-tify entrepreneurial firms in these three in-dustries.2 In the biotechnology industry, allU.S. publicly traded companies with fewerthan 100 employees were sent a survey. Inthe oil and gas industry, a random sample offirms with fewer than 100 employees was se-lected. In the telecommunications industry,a random sample of U.S. publicly tradedfirms with fewer than 100 employees andoperating in Standard Industrial Classifica-tion (SIC) codes of 3663, 3669, 4813, 4833,and 7372 was selected. The choice to limitfirm size in this sample to 100 employeesuses a conservative characterization of en-trepreneurial firms and was expected tomake the relationships among the variablesof interest easier to identify.

The survey development process pro-ceeded in three phases. In the first phase,interviews were conducted with 28 man-agers in large and entrepreneurial firms.These managers were all directly involvedin creating and or managing these firms’ al-liance strategies. In phase two, these inter-views were used to develop and pretest asurvey. An additional 15 interviews wereconducted during this phase of data collec-tion. The third phase of data collectionused a revision of the first survey. Themethod utilized to develop the final surveyis similar to Geringer (1988), Parkhe(1993), Simmonin (1999), and Capron(1999), and its development and adminis-tration followed the “total design approach”advocated by Dillman (1978).

A cover letter, return-stamped envelope,and survey were addressed and mailed tothe directors of business development foreach company sampled. Directors of busi-ness development were selected as key in-formants at each firm after the preliminary

field interviews suggested that they held thepredominant responsibility for determininggovernance arrangements for strategic al-liances. This increased the likelihood thatthose completing the survey were knowl-edgeable about their firm’s alliance experi-ence (Kumar, Stern, & Anderson, 1993). Asingle-informant methodology was used be-cause few individuals were knowledgeableabout relationship governance and perfor-mance (Podsakoff & Organ, 1986).3 Respon-dents were asked in the cover letter to “thinkof a specific alliance agreement with a largefirm (over 500 employees and a billion ormore in sales) when answering the survey.”The potential bias from respondents favoringmore successful alliances on the survey isvery low as the limited resources of these en-trepreneurial firms prevent them from form-ing more than a very small number of al-liances with large firms as defined here.

A total of 657 surveys were mailed; 134surveys were returned. Of these, seven indi-cated that their firm had not pursued any al-liances with large firms, while 127 indicatedthat their firm had pursued at least one al-liance with a large firm. Since the number ofthe 657 firms in the original sample pursuingalliances with at least one large firm is notknown, an exact response rate cannot be cal-culated for this study. However, this responserate can be no less than 19.5% (127 firmspursuing at least one alliance that returned asurvey divided by 657 total firms minusseven firms that were not pursuing any al-liances with large firms). This minimumsample return is acceptable for managerialsurveys conducted in multiple industries(Robertson & Gatignon, 1998).

Nonresponse bias was evaluated bycomparing early respondents (first half)with late respondents (second half) follow-ing the Armstrong and Overton (1977) ex-trapolation method. Three variables (use ofalliances as a formal growth strategy(t � �.314, p � .755), impact of alliances onachieving growth (t � –.207, p < .837), andimpact of alliances on competitive position(t � �.603, p � .548) were not significantlydifferent between early and late respon-dents. Thus, we conclude that there is littleevidence of nonresponse bias.

... fewindividualswere knowl-edgeable aboutrelationshipgovernance andperformance.


... entrepre-neurial firmsjoin alliances with large firms to obtainresourcesnecessary fortheir growthand success...

In addition, because the dependent andindependent variables are both reported by asingle survey respondent, there is a potentialfor common methods bias. Single-factortests suggest that there is not a significantamount of common variance in the data(e.g., Doty & Glick, 1998) as a factor analy-sis of all the variables did not generate a sin-gle factor or a general factor that accountsfor most of the variance (Podsakoff &Organ, 1986). An unrotated factor analysisusing the eigenvalue-greater-than-one crite-rion revealed three distinct factors, and thefirst factor captured only 35.5% of the vari-ance in the data. Furthermore, the allianceperformance measure loaded on one factor,and the independent variables loaded on twoothers.4

As anticipated, the number of entrepre-neurial firms pursuing alliances with atleast one large firm varied by industry: 93completed surveys were returned from thebiotechnology industry, 19 from the infor-mation technology industry, six from the oiland gas industry, and nine completed sur-veys were returned with the industry codemissing. Because of these differences inthe number of completed surveys, it wasnot possible to examine industry effects inour empirical work.

Measures

Dependent variable. This study adopts aperceptual measure of alliance perfor-mance. Since entrepreneurial firms join al-liances with large firms to obtain resourcesnecessary for their growth and success, theextent to which an entrepreneurial firmperceives that it has obtained these re-sources from such an alliance is taken asthe measure of perceived alliance perfor-mance. Perceived alliance performance ismeasured using the following questions(Larson, 1991):

Y1 The alliance was critical to the suc-cess of my firm when it first began.

Y2 New jobs were created at my firm asa result of the alliance.

Y3 The alliance resulted in reduced riskfor my firm.

Y4 The alliance increased my firm’s abil-ity to attract external funding fromother sources.

An internal reliability test showed astrong Cronbach alpha of 0.8449 for per-ceived alliance performance.

Independent variables. The four independentvariables of interest are measured using single-item global measures. It has been shown thatsingle-item global measures are at least as reli-able, and more inclusive, than multiple-itemmeasures (Scarpello & Campbell, 1983).

The extent to which trust is an importantgovernance device in the relationship betweenentrepreneurial and large-firm alliances ismeasured using the following question:

Q1 To what extent do you trust your al-liance partner?

Whether or not firms use a formal con-tract to manage their relationship is mea-sured with the following question:

Q2 Is there, or was there ever, a writtencontract defining your alliance?

The extent to which firms use the repu-tation of potential exchange partners as agovernance device was measured using thisquestion:

Q3 How important was your alliancepartner’s reputation to your firmwhen selecting a partner?

The final independent variable in this re-search, bargaining power, was measured withthe following question:

Q4 Does your company have more orless bargaining power than your al-liance partner?

Control variable. To isolate the effect ofthese variables of interest, a control variablewas added to the analysis. The age of the al-liance at the time of the survey is expected tohave a relationship with the theoretical vari-ables of interest. Specifically, the older the


alliance, the more opportunity it has to sig-nificantly impact the entrepreneurial firm’sperceived performance. Alliance age wasmeasured with a survey question.

The means, standard deviations, andcorrelation among these variables are pre-sented in Table I.

A factor analysis was performed to re-duce the four perceived alliance perfor-mance variables into one factor. A varimaxrotation was performed for ease of interpre-tation and explains 87.4% of overall vari-ance. The four perceived alliance perfor-mance variables load together with allloading factors exceeding 0.70 indicatingclose association of each variable with thegroup of variables that make up that factor(Robinson, Shaver, & Wrightsman, 1991).All of the independent variables and thecontrol variable load separately with allloading factors exceeding 0.90 suggestingthat they are, in fact, measuring different

concepts. Table II shows the variables load-ing on each of the six factors after the vari-max rotation. The factor scores obtainedthrough the factor analysis for perceived al-liance performance are used in the regres-sion analysis as independent variables.

RESULTS

The hypotheses were tested primarilyusing multiple regression techniques. Model1, presented in Table III, tests Hypotheses1a through 1d. Support is found for Hy-potheses 1a, 1c, and 1d as trust, reputation,and bargaining power are significantly re-lated to perceived alliance performance. Hy-pothesis 1b is not supported. That contractsare not significantly related to the depend-ent variable in our sample is not surprising,however, as formal contracts were used as agovernance device in 98% (125 out of 127)of the strategic alliances examined. This lack

Descriptive Statistics and Correlation Matrix a

Mean S. D. (1) (2) (3) (4) (5)1 Perceived alliance

performance factor .000 1.0002 Alliance age 3.267 1.487 .313***

3 Trust 4.913 1.391 .188** .0344 Contract .984 .124 .121 .279*** .0835 Reputation 5.129 1.363 .268*** �.172* .060 �.0346 Bargaining power 3.252 1.321 �.323*** �.192** .167* �.024 �.201**

aN = 127; * p < .10; ** p < .05; *** p < .01

TABLE I

Rotated Component Matrix a

1 2 3 4 5 6

Alliance age .915Trust .984Contract .974Reputation .970Bargaining power .956Alliance critical to early success .811New jobs created .814Reduced risk .829Ability to attract external funding .768

Extraction method: principal component analysis. Rotation method: Varimax with Kaiser normalization.aRotation converged in six iterations.

TABLE II


of variance in the use of contracts in oursample has at least two implications. First,that contracts were so widely used by firmsin the sample strongly suggests both thatcontracts are an important governance de-vice and that they may influence allianceperformance. Second, the use of contracts isindependent of the use of trust, reputation,and bargaining power because the extent towhich any of these three governance devicesare used has no influence on the use of con-tracts. Thus, Hypotheses 2a, 2b, and 2c areall supported, as use of contracts does notsignificantly correlate with trust (0.083),reputation (�0.034), or bargaining power(�0.024), respectively.

To test hypothesis 3 regarding whetheror not trust and reputation are comple-ments or substitutes, only a single equationmust be estimated:

Y = �0 � �1Trust � �2Reputation� �3Trust � Reputation

If the coefficient �3 is positive and sig-nificant, trust and reputation are comple-ments. If this coefficient is negative and sig-nificant, trust and reputation are substitutes.Model 2 in Table III supports Hypothesis 3,as the trust and reputation interaction termis significant and negative indicating thatthese two governance devices are substitutes.

In testing Hypotheses 4a and 4b, bothcorrelation and regression analyses are re-quired. The correlation analysis shows that

bargaining power is neither independent oftrust (*0.167) nor of reputation (**�0.201).The regression analysis in Model 1 showsthat bargaining power is neither an alterna-tive to trust nor an alternative to reputationas the coefficients for all of these variablesare significant when they are in the model to-gether. Bargaining power, trust, and reputa-tion all explain unique portions of the vari-ance in perceived alliance performance sothey must not be alternatives. Thus, Hy-potheses 4a and 4b are not supported.

DISCUSSION

The purpose of this article is to examinethe relationship between trust and other gov-ernance devices firms use to manage theirexchanges with other firms. In the process,the relationships among these other gover-nance devices are also examined. The resultis a new understanding about which gover-nance devices tend to be used together andwhich ones do not.

Starting from the confirmation that allfour of these governance devices of interest areused in varying bundles to impact the perfor-mance of alliances between entrepreneurialfirms and large firms, the relationship amongthese devices begins to take shape with the re-alization that practically all of the allianceshere rely on formal contracts. Perhaps thestrength of contracts is that they are intendedto specify the rights and responsibilities of theparties as the exchange evolves. This flexibility

Multiple Regression Estimation Results for Perceived Alliance Performance

Independent Variable (1) (2)

Intercept �1.917** (.762) �4.447*** (1.262)Alliance age .199*** (.056) .199*** (.055)Trust .145** (.057) .625*** (.201)Contracts .199 (.644) .241 (.630)Reputation .189*** (.060) .665*** (.200)Bargaining power �.188*** (.062) �.186*** (.061)Trust Reputation �.091** (.037)Model F value 9.538*** 9.319***

R-square .283 .318N 127 127

Standard errors appear in parentheses.* p < 0.10; ** p < 0.05; *** p < 0.01

TABLE III


provided by contracts may protect against badjudgment regarding, or changes in the levelsof, trust, reputation, and bargaining power.

Additionally, this article shows that trustand reputation address the same governanceproblems in about the same way. Entrepre-neurial firms that rely on both trust and repu-tation simultaneously reduce the benefits froman alliance with a large firm over and above theindependent effects of trust and reputation. Inthis setting, increasing investment in one oranother of these devices creates positive gover-nance outcomes. However, investing in both ofthese devices simultaneously generally in-creases the cost of managing an alliance with-out a commensurate increase in alliance bene-fits. This has the effect of reducing the netbenefits associated with an alliance.

Finally, the relationships between bar-gaining power and trust and between bargain-ing power and reputation begin to take shape.First, the amount of bargaining power is notindependent of either the amount of trust orthe reputation of the alliance partner. It is notunreasonable to expect that bargaining poweris a consideration when a firm is assessing itsamount of trust with and the reputation effectof a specific party. Bargaining power is, after

all, relative to a specified party. Second, be-cause neither trust nor reputation are alterna-tives to bargaining power, entrepreneurialfirms that use either of these devices togetherwith bargaining power in alliances with largefirms will tend to achieve higher alliance per-formance. Given that trust and reputation aresubstitutes, however, alliance performance ishighest when either, but not both, of these de-vices are used with bargaining power.

CONCLUSION

Firms can use any of the three resources—trust, reputation, and bargaining power—asbundles in their governance devices; how-ever, these three resources are not equallylikely to be sources of competitive advan-tage. While this is true for any exchange, itis particularly pertinent for exchanges be-tween firms of unequal size (as our sampleof entrepreneurial and large firms indicates)and with different levels of bargainingpower. Firms should understand that thechoice to use trust as a governance deviceshould take into account the conditionsunder which trust will be a source of com-petitive advantage.

Sharon A. Alvarez is an assistant professor of entrepreneurship at the Max M.Fisher College of Business, Ohio State University. She received her BSBA in businessfrom the University of Colorado, an International MBA from the University of Den-ver, and her PhD in entrepreneurship and strategy from the University of Colorado.She has published in the Academy of Management Executive, the Journal of BusinessVenturing, the Journal of Management, and Human Resource Management Journal.

Jay B. Barney is the Bank One Chair in Corporate Strategy at the Max M. Fisher Col-lege of Business, Ohio State University. He received his PhD from Yale and has heldfaculty appointments at UCLA and Texas A&M. His research focuses on the resource-based view of the firm, a theory that emphasizes the role of idiosyncratic and non-tradable assets in generating sustained competitive advantage for firms.

Douglas A. Bosse is a doctoral student of entrepreneurship at the Max M. FisherCollege of Business, Ohio State University. He received his BS in finance from MiamiUniversity and his MBA in operations and logistics management from Ohio State Uni-versity. His work experience includes commercial banking and over ten years in cor-porate strategy consulting at such companies as Duke Energy, Schneider National,Sharp Electronics, and National Steel. Doug has counseled several entrepreneurialfirms and served on the board of directors at the Strategic Account Management As-sociation for seven years. His current research interests include the effects of uncer-tainty on entrepreneurial firms.


NOTES

1. Each of these four relationships is mutually ex-clusive. A relationship that is independent can-not also be a complement or a substitute be-cause no correlation results in no interactioneffect. Independent is also distinct from alter-native because alternative indicates significantcorrelation. The sign of the interaction effectdistinguishes complement and substitute. Alter-native is exclusive to complement, and substi-tute as the interaction term would result in se-vere multicollinearity.

2. The following directories were used: HealthCare Atlas, Acquisition, Technology Transfer, andSources of Capital Directory, 1996 for biotech-nology; Armstrong Oil and Gas Directory, 1998for oil and gas; and Corporate Information Tech-nology Services, Inc. Database, Revision 14 fortelecommunications software.

3. Since these managers were reluctant to sharethe identity of their alliance partner beyond ageneral description, a dyadically matched sup-plier-side data collection was not attempted.

4. These complete results can be obtained fromthe first author.

REFERENCES

Alvarez, S. A., & Barney, J. B. (2001). How can en-trepreneurial firms really benefit from allianceswith large firms? Academy of Management Ex-ecutive, 15(1).

Arrow, K. J. (1974). The limits to organization. NewYork: W. W. Norton.

Bacharach, S. B., & Lawler, J. L. (1984). Bargaining:Power, tactics, and outcomes. San Francisco:Jossey-Bass.

Barney, J. B., & Hansen, M. H. (1994). Trustworthi-ness as a source of competitive advantage.Strategic Management Journal, 15, 175–190.

Barney, J. B., & Hesterly, M. W. (1996). Organiza-tional economics: Understanding the relation-ship between organizations and economicanalysis. In S. Clegg, C. Hardy, & W. Nord(Eds.), Handbook of organization theory (pp.115–147). London: Sage.

Capron, L. (1999). The long-term performance ofhorizontal acquisitions. Strategic ManagementJournal, 20, 987–1017.

Deeds, D., & Hill, C. (1998). An examination of op-portunistic action within research alliances: Ev-

idence from the biotechnology industry. Journalof Business Venturing, 14, 141–163.

Dillman, D. (1978). Mail and telephone surveys:The total design method. New York: Wiley.

Donaldson, L. (1990). The ethereal hand: Organiza-tional economics and management theory.Academy of Management Review, 15, 369–381.

Doty, D. H., & Glick, W. H. (1998). Common meth-ods bias: Does common methods variance reallybias results? Organizational Research Methods,1, 374–406.

Etzioni, A. (1988). Normative-Affective factors: To-ward a new decision-making model. Journal ofEconomic Psychology, 9(2), 125–150.

Fisher, L. (1996). How strategic alliances work inbiotech. Technology, Winter.

Gambetta, D. G. (Ed.). (1988). Trust: Making andbreaking co-operative relations. New York: BasilBlackwell.

Geringer, J. M. (1998). Assessing replication and ex-tension. A commentary on Glaister and Buck-ley: Measures of performance in UK interna-tional alliances. Organization Studies, 19,119–138.

Gulati, R. (1995). Social structure and alliance for-mation patterns: A longitudinal analysis. Ad-ministrative Science Quarterly, 40, 619–652.

Hagedoorn, J. (1993). Understanding the rationaleof strategic technology partnering: Interorgani-zational modes of cooperation and sectoral dif-ferences. Strategic Management Journal, 14,371–386.

Hagedoorn, J. (1995). A note on international mar-ket leaders and networks of strategic technologypartnering. Strategic Management Journal, 16,241–250.

Hill, C. W. L. (1990). Cooperation, opportunism,and the invisible hand: Implications for trans-actions cost theory. Academy of ManagementReview, 15, 500–513.

Klein, B., Crawford, R., & Alchian, A. (1978). Verti-cal integration, appropriable rents, and thecompetitive contracting process. Journal of Law& Economics, 21, 297–326.

Kumar, N., Stern, L. W., & Anderson, J. C. (1993).Conducting interorganizational research usingkey informants. Academy of Management Jour-nal, 36, 1633–1651.

Larson, A. (1991). Network dyads in entrepreneurialsettings: a study of the governance of exchangerelationships. Administrative Science Quarterly,37, 76–104.


Lewicki, R. J., McAllister, D. J., & Bies, R. J. (1998).Trust and distrust: New Relationships and real-ities. Academy of Management Review, 23,438–458.

Li, F., Duncan, T. E., & Acock, A. (2000). Model-ing interaction effects in latent growth curvemodels. Structural Equation Modeling, 7,497–533.

March, J. G., & Simon, H. A. (1958). Organizations.New York: Wiley.

Mayer, R. C., Davis, J. H., & Schoorman, F.D.(1995). An integrative model of organizationaltrust. Academy of Management Review, 20,709–734.

Mishra, A. K. (1996). Organizational responses tocrisis: The centrality of trust. In R. M. Kramer& T. R. Tyler (Eds.), Trust in organizations:Frontiers of theory and research (pp. 261–287).Thousand Oaks, CA: Sage.

Parkhe, A. (1993a). Strategic alliance structuring: Agame theoretic and transaction cost examina-tion of interfirm cooperation. Academy of Man-agement Journal, 36, 794–829.

Parkhe, A. (1993b). Messy’ research, methodologicalpredispositions, and theory development in in-ternational joint ventures. Academy of Manage-ment Review, 18, 227–268.

Podsakoff, P. M., & Organ, D.W. (1986). Self-reportsin organizational research: Problems andprospects. Journal of Management, 12, 531–544.

Raphael, D. E. (1998). The future of telecommuni-cations: Connectivity through alliances. Busi-ness Economics, 33(2), 32–36.

Reamer, D. (1997). How to identify the key ele-ments of successful industry alliances. The Oiland Gas Journal, 95(14), 25–30.

Ring, P. S., & Van de Ven, A. H. (1992). Structuringcooperative relationships between organiza-tions. Strategic Management Journal, 13,483–498.

Robertson, T. S., & Gatignon, H. (1998). Technol-ogy development mode: A transaction cost con-

ceptualization. Strategic Management Journal,19, 515–531.

Robinson, J. P., Shaver, P. R., & Wrightsman, L. S.(1991). Criteria for scale selection and evalua-tion. In J. P. Robinson, P. R., Shaver, & L. S.Wrightsman (Eds.), Measures of personalityand social psychology attitudes (pp. 1–16). SanDiego, CA: Academic Press.

Rousseau, D., Sitkin, S., Burt, R., & Camerer, C.(1998). Not so different after all: A cross-disci-pline view of trust. Academy of ManagementReview, 28, 393–404.

Sabel, C. F. (1993). Studied trust: Building newforms of cooperation in a volatile economy.Human Relations, 46, 1133–1170.

Sarkar, M. B., Echambadi, R., & Harrison, J. S.(2001). Alliance entrepreneurship and firmmarket performance. Strategic ManagementJournal, 22, 701–711.

Scarpello, V., & Campbell, J. P. (1983). Job satisfac-tion: Are all parts there? Personnel Psychology,36, 577–600.

Sheppard, B. H., & Sherman, D. M. (1998). Thegrammars of trust: A model and general implica-tions. Academy of Management Review, 28,422–437.

Simmonin, B. L. (1999). Knowledge transfer instrategic alliances. Strategic Management Jour-nal, 20, 595–632.

Tirole, J. (1988). The theory of industrial organiza-tion. Cambridge, MA: MIT Press.

Williamson, O. E. (1975). Markets and hierarchies.New York: Free Press.

Williamson, O. E. (1985). The economic institu-tions of capitalism. New York: Free Press.

Williamson, O. E. (1993). Opportunism and its crit-ics. Managerial and Decision Economics,14(2), 97–107.

Zaheer, A., McEvily, B., & Perrone, V. (1998). Thestrategic value of buyer-supplier relationships.International Journal of Purchasing and Mate-rials Management, 34(3), 20–26.

Documents

Trust and its alternatives