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Trust, contract and relationship development
Klein Woolthuis, R.J.A.; Hillebrand, B.; Nooteboom, B.
published in
Organization Studies
2005
DOI (link to publisher)
10.1177/0170840605054594
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citation for published version (APA)
Klein Woolthuis, R. J. A., Hillebrand, B., & Nooteboom, B. (2005). Trust, contract and relationship development.
Organization Studies, 26(6), 813-840. https://doi.org/10.1177/0170840605054594
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Organization Studies
http://oss.sagepub.com/content/26/6/813
The online version of this article can be found at:
DOI: 10.1177/0170840605054594
2005 26: 813Organization Studies
Rosalinde Klein Woolthuis, Bas Hillebrand and Bart Nooteboom
Trust, Contract and Relationship Development
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Trust, Contract and Relationship Development
Rosalinde Klein Woolthuis, Bas Hillebrand and Bart Nooteboom
Abstract
This article contributes to the debate on the relation between trust and control in the
management of inter-organizational relations. More specifically, we focus on the
question how trust and formal contract are related. While there have been studies on
whether trust and contract are substitutes or complements, they offer little insight into
the dynamic interaction between the two. They fail to answer, first, whether contract
precedes trust or follows it, in other words, what causal relationship exists between
the concepts; second, how and why trust and contract can substitute or complement
each other; and third, how the various combinations of trust and contract affect a
relationship’s development and outcome. In search of answers, we conducted longi-
tudinal case studies to reveal the relationship between trust, contract and relationship
outcome in complex inter-firm relationships. We find trust and contract to be both
complements and substitutes and find that a close study of a contract’s content offers
alternative insight into the presence and use of contracts in inter-firm relationships.
Keywords: trust, contracts, transaction costs, control, inter-organizational relation-
ships, longitudinal case study
According to classical transaction cost economics (TCE; see Williamson
1975, 1985), relations that entail specific investments create dependence and
vulnerability to opportunistic ‘hold-up’. Also, TCE argues that it is impossible
to reliably judge possible limits to other people’s opportunism and that trust
does not yield a reliable safeguard. From a social science perspective, many
people take the view that trust is viable and that it may be an important
element in the mitigation of relational risk (e.g. Macaulay 1963; Ouchi 1980;
Gambetta 1988; Gulati 1995; McAllister 1995; Chiles and McMackin 1996;
Nooteboom 1996). As Knights et al. (2001: 314) note, ‘a long tradition of
management thought conceptualizes trust and control as opposing alter-
natives’ in which high trust allows for limited formal control and vice versa.
However, empirical evidence about the relationship between trust and formal
control is mixed. Conceptual contributions, much in line with TCE thinking
and incomplete contracting theory, claim that legal regulation is an important
precondition for trust (Luhmann 1979; Zucker 1986). Empirical studies, on
the contrary, found that trust preceded contracts (Larson 1992) and higher
levels of formalization and vertical integration (Anderson and Narus 1990;
Zaheer and Venkatraman 1995; Poppo and Zenger 2002). In the words of
Organization
Studies
26(6): 813–840
ISSN 0170–8406
Copyright © 2005
SAGE Publications
(London,
Thousand Oaks,
CA & New Delhi)
813 Authors name
www.egosnet.org/os DOI: 10.1177/0170840605054594
Rosalinde Klein
Woolthuis
Free University
Amsterdam, The
Netherlands
Bas Hillebrand
University of
Nijmegen, The
Netherlands
Bart Nooteboom
Tilburg University,
The Netherlands
at Vrije Universiteit 34820 on April 8, 2011oss.sagepub.comDownloaded from
Lane (1998: 25) we may conclude that there is a ‘fundamental disagreement
in the literature’ on the relationship between trust and control.
This article contributes to this debate on the relationship between trust
and control in the management of inter-organizational relationships. More
specifically, we focus on contracts as a form of formal control. The key
question of this article is: How are trust and contract related? We will answer
this question by addressing the following sub-questions: Are trust and contract
complements or substitutes, or both? Does contract precede trust or does it
follow it? And how does this affect relationship development and perfor-
mance? In view of the importance of relationship development in our analysis,
our unit of analysis is not a transaction, as in TCE, but the relationship in
which transactions arise and develop.
Before we proceed, we first define the key concepts — trust and contract
— since we believe that much disagreement in the current literature is likely
to be due to confusion over the definition of these concepts. Next, we discuss
the literature on the relationship between trust and contract. We then explain
the methodology for the empirical part of our study, and present the results.
Finally, we draw conclusions, discuss these conclusions and give suggestions
for further research.
Trust and Control
For a clear understanding of trust, we employ Nooteboom (2002). We have
to distinguish between competence trust and intentional trust. The first refers
to the trust one has in the technical, cognitive, organizational, and communi-
cative competences of a partner. We focus on intentional trust, referring to
the trust one has in the intentions of a partner towards the relationship,
particularly in refraining from opportunism. Opportunism can have a
passive/weak and an active/strong form. The passive form entails lack of
dedication in performing to the best of one’s competences. The active form
of opportunism entails ‘interest seeking with guile’ (Williamson 1975); lying,
stealing and cheating to expropriate advantage from a partner. The absence
of such active opportunism is called ‘benevolence’ or ‘goodwill’. Thus, inten-
tional trust has two dimensions: trust in dedication and trust in benevolence/
goodwill.
We propose that, like trust, control may be interpreted in a weak and in a
strong way. In a weak interpretation, control is regarded as any instrument or
condition that may mitigate relational risk. This could include trust. In a strong
form, control is seen as ‘deterrence’ (Maguire et al. 2001), i.e. in case of
opportunistic behaviour the partner incurs a penalty or material loss. In other
words, here control is based on power.
Based on the distinction between weak and strong forms of trust/
opportunism, control can be designed accordingly. Following Nooteboom
(1996) we suggest that relational risk may be mitigated in three ways: oppor-
tunity control, incentive control and benevolence (or goodwill). These three
ways of mitigating relational risk may be based on macro or universalistic
814 Organization Studies 26(6)
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and micro or particularistic sources (Williams 1988; Nooteboom 2002;
Deutsch 1973; Shapiro 1987; Bachmann 1998), as shown in Table 1. Macro
sources are general and impersonal, aside from any specific exchange relation.
They arise from the institutional environment of laws, norms, values,
standards, and agencies for their enforcement
.
. This yields ‘institution-based’
or ‘thin’ trust. This kind of trust is based on the trust we have in those
institutions to support or enforce trustworthiness of people and organizations.
The micro sources arise in specific relations, are personalized and are referred
to as sources of ‘thick’ trust.
As Table 1 indicates, there are three ways of mitigating relational risk
(Nooteboom 1996). Opportunity control refers to the limitation of opportu-
nities for opportunism by restricting the range of a partner’s actions. It has
an ‘outside form’ which refers to control of external partners by contract
(enforcement), and an ‘inside form’ within an organization which refers to
the exercise of ‘hierarchy’ and/or managerial ‘fiat’ under an employment
relationship. Both entail monitoring of behaviour to detect cheating, and
sanctions as a manner of enforcement.
Incentive control refers to the limitation of material incentives to utilize
opportunities for opportunism due to dependence on the relationship. In other
words, it refers to the situation that partner B behaves well towards A because
B is dependent on A (e.g. because A has a unique value to B), B faces
switching costs (e.g. as a result of relation-specific investments), or A holds
a hostage from B. The notion of specific investments is derived from TCE,
except that we consider the relation rather than the transaction as the unit of
analysis, and hence speak of relation-specific investments. In this, investments
may include the building of relation-specific mutual understanding and trust.
The notion of hostages is also taken from TCE. It mostly takes the form of
sensitive information that is of value to B, and is held by A, who can destroy,
divulge or transfer it to a competitor of B, if B does not behave well.
The third way of mitigating relational risk, benevolence, refers to the
limitation of inclinations towards opportunism based on established, socially
inculcated norms and values (macro), and empathy, identification, affect and
routines developed in specific relations (micro). The first includes pressures
Klein Woolthuis et al.: Trust, Contract and Relationship Development 815
Macro, universalistic Micro, particularistic;
relation-specific
Self-interest
Opportunity control Contracts, legal enforcement Hierarchy, managerial fiat
Incentive control Reputation Dependence: unique partner value,
switching costs, hostages
Altruism
Benevolence Values, social norms, moral Empathy, identification
obligation, sense of duty, routinization, affect, friendship
bonds of kinship
Source: adapted from Nooteboom (2002)
Table 1.
Limitation of
Opportunism
(Trustworthiness
Broadly Interpreted)
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