Question

what is the Zucker, E. (2018 The economics of mistrust? In the End of Trust(McSweeney's 54), 96-107

Answer 1

TRUST AND DISTRUST AFFECTING FORMAL COORDINATION AND CONTROL A large body of literature proposes that trust may act as a substitute for formal control, as higher degrees of trust reduce the need for control (e.g. Das and Teng, 2001; Dyer and Singh, 1998; Gulati, 1995; Inkpen and Currall, 2004; Zaheer and Venkatraman, 1995). From this perspective, trust and formal control consist of “functionally equivalent strategies for absorbing uncertainty and dealing with the freedom and indeterminacy of other agents” (Knights et al., 2001, p. 329; see also Reed, 2001; Zucker, 1986). Both forms governance increase the perceived predictability of social actors’ future behaviors (Luhmann, 1979; Nooteboom, 2002). This implies that if managers lose trust in their partner, more resources have to be invested in formal control (Dyer and Chu, 2003; Inkpen and Currall, 2004), while increments in trust reduce the need to do so (Inkpen and Currall, 2004; Zaheer et al., 1998). This substitution effect between trust and formal control is conditional upon the existence of a certain degree of distrust. After all, if managers do not have any reason to distrust their partner (e.g. the perceived opportunities and payoffs for opportunistic behavior by a partner are low), a lack of trust does not have to be compensated by a an increase in formal control.

Trust also exhibits a positive relationship with formalization, in that higher degrees of trust enable higher levels of formal coordination and control (Dekker, 2004). Trust facilitates open communication and negotiations on the details of contracts, “including the thorny sensitive clauses like relationship termination” (Klein Woolthuis et al., 2005, p. 831). Furthermore, by facilitating information sharing (Dyer and Chu, 2003; Dyer and Singh, 1998) and by functioning as a “lubricant of economic exchange” (Knights et al., 2001, p. 312), trust enables parties to record aspects of their relationships in formal contracts and documents. Distrust, instead, entails low degrees of information exchange, and limited opportunities to observe and learn from partners (Maguire et al., 2001), which reduce their possibilities to formalize the relationship. We contend that the enabling character of trust and the restricting nature of distrust pertain both to formalization’s coordination function and its control function. After all, communication and information exchange are conducive to codification and enforcement in general. Moreover, as the coordination and control functions of formalization are strongly intertwined, an enabling or restricting influence on one of them will generally affect the other function as well (Foss and Foss, 2005; Madhok, 2002).

Basic levels of trust function as a prerequisite for interorganizational cooperation, because they help to generate and maintain interaction and social order (Bachmann et al., 2001; Inkpen and Curall, 2004; Luhmann, 1979; Reed, 2001). In particular, “[I]n the face of unknown conditions, unintended consequences, existing zones of uncertainty, and the prevailing dialectic of control, social interaction always requires some trust” (Sydow and Windeler, 2003, p. 79). Otherwise, interorganizational relationships would be pervaded by very high levels of uncertainty, causing managers to continually question the motives and competences of their partners (Das and Teng, 2001; McEvily et al., 2003a). In such cases, they become less willing to take risks, and they refrain from sharing perspectives and knowledge (Bijlsma-Frankema, 2004; March and Olsen, 1975). Similarly, we contend that excessively high levels of distrust prohibit beneficial cooperation as well, as potential partners may become reluctant to initiate relationships, or because their relationships are pervaded by so much suspicion, that they are not able to capitalize on joint opportunities for value creation.