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Interorganizational Trust, Governance Choice, and Exchange Performance

Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
John M. Olin School of Business, Washington University in St. Louis, St. Louis, Missouri 63130
r-gulati{at}kellogg.northwestern.edu
nickerson{at}wustl.edu

This paper looks at when and how preexisting interorganizational trust influences the choice of governance and in turn the performance of exchange relationships. We theorize that preexisting interorganizational trust complements the choice of governance mode (make, ally, or buy) and also promotes substitution effects on governance mode choice while impacting exchange performance. We evaluate hypotheses using a novel three-stage switching regression model and a sample of 222 component-sourcing arrangements of two assemblers in the automobile industry. Analysis of our data broadly supports our hypotheses. High levels of preexisting interorganizational trust increased the probability that a less formal, and thus less costly, mode of governance was chosen over a more formal one. This finding suggests a substitution effect of interorganizational trust on governance mode choice that in turn shapes exchange performance. We also found a complementary effect of trust on performance: Regardless of the governance mode chosen for an exchange, trust enhanced exchange performance. Additional evidence of the complementary effect of trust on performance was that trust somewhat reduced interorganizational conflict.

Key Words: interorganizational trust; governance choice; exchange performance; interorganizational relations; transaction cost economics