The Economic Value of Trust in Supplier-Buyer Relationships

Abstract

In this paper we investigate the relationship between supplier trust in the buyer and transaction costs, information sharing, and re[ation-specific investments in a sample of 453 supplier automaker exchange relationships in the U. S., Japan, and Korea. Our findings indicate that trust reduces transaction costs and increases information sharing in supplier-buyer relationships. Moreover, the findings suggest that the economic value created for transactors, in terms of lower transaction costs, may be substantial. In particular, we found that the automaker with the least trusting supplier relations spent twice as much of its face-to-face interaction time with suppliers on ex ante contracting and ex post haggling when compared to the most trusted automakers. This translated into procurement (transaction) costs which were as much as five times higher for the least trusted automaker compared to the most trusted automaker. Finally, we argue that trust is unique as a governance mechanism because it not only minimizes transaction costs, but also has a mutually causal relationship with other behaviors (i.e. information sharing. buyer technical assistance) that create value in the exchange relationship. Other governance mechanisms (e. g.. contracts. financial hostages) are necessary costs incurred to prevent opportunistic behavior but do not create value beyond transaction cost minimization. Thus, our findings indicate that trust in supplier-buyer relations can create economic value and may be an important source of competitive advantage.