Content provided in partnership with

Business Services Industry

The effects of contracts on interpersonal trust

Administrative Science Quarterly, Sept, 2002 by Deepak Malhotra, J. Keith Murnighan

This paper uses two laboratory experiments to investigate the effects of contracts on interpersonal trust. We predict that the use of binding contracts to promote or mandate cooperation will lead interacting parties to attribute others' cooperation to the constraints imposed by the contract rather than to the individuals themselves, thus reducing the likelihood of trust developing. We also predict that, although non-binding contracts may not generate as much initial cooperation as binding contracts, they will generate personal rather than situational attributions for any cooperation that results and will therefore not interfere with trust development. Two experiments investigated the effects of the use and removal of binding and non-binding contracts. When binding contracts that were previously allowed were no longer allowed or no longer chosen, trust dropped significantly. In contrast, non-binding contracts led to considerable cooperation, and their removal reduced trust less than removing binding contracts. Behavioral and perceptual data suggest that non-binding contracts lead to personal attributions for cooperation and thus may provide an optimal basis for building interpersonal trust in a variety of situations.

Most Popular Articles in Business: Research and Markets : Tesco Plc - SWOT Framework Analysis; Do Us a Flavor - Ben & Jerry's Issues a Call for Euphoric New Flavors; eBay made easy: ready to start an eBay business? These 5 simple steps will ...; Katrina's lawsuit surge: a legal battle to force insurers to pay for flood ...; Wal-Mart's newest distribution center opened last month near the southwest ...; More »

People in social and organizational contexts often face risk and uncertainty in their interpersonal interactions (Arrow, 1974; Fukuyama, 1995). To mitigate these problems, individuals and organizations rely on both formal structures, such as hierarchies, regulations, and contracts (e.g., Williamson, 1975), and informal structures, such as communication, norms, and trust (e.g., Macauley, 1963; Kramer and Tyler, 1996). Among the formal mechanisms, the use of contracts is both prevalent and pervasive. In organizations, contracts have become routinized solutions to problems of agency, control, and uncertainty. Between organizations, contracts dictate the terms of buyer-seller relationships, alliances, and joint ventures. In social domains, contracts facilitate exchanges by reducing uncertainty (e.g., Williamson, 1979), eliminating risk (e.g., Williamson, 1996), enhancing control (e.g., Klein, 1993), and mitigating agency problems (Jensen and Meckling, 1976). Often, contracts make it possible for risk-averse parti es to create mutually beneficial relationships. In cases like employer-employee relationships, contracts are often taken for granted, even though their details may be negotiated.

Although contracts may be necessary as stakes increase (cf. Jensen and Meckling, 1976), cooperation can also be achieved without them. Informal mechanisms such as trust can help solve agency problems (e.g., Jones, 1995), facilitate market processes (Arrow, 1974), and increase cooperation within and between organizations (e.g., Smith, carroll, and Ashford, 1995). Trust increases cooperation in strategic interactions (e.g., Mayer, Davis, and Schoorman, 1995), information sharing in negotiations (Thompson, 1991), and the mutual benefits of interpersonal interactions (e.g., Siamwalla, 1978). Trust can also reduce uncertainty (Kollock, 1994) and lead to more efficient negotiated agreements (e.g., Carnevale and Isen, 1986).

The literature suggests that contracts and trust can or do substitute for one another (Zucker, 1986; Ring and Van de Ven, 1994; Guseva and Rona-Tas, 2001). If trust has not been established, a contract that specifies the rights and responsibilities of the parties makes sense (e.g., Coffrin and Cochran, 1982; Sitkin and Roth, 1993). If trust is strong, the parties may feel no need for the specifics or constraints of a contract. Instead, they may be able to fulfill mutually beneficial agreements without one (e.g., Zaheer and Venkatraman, 1995; Uzzi, 1997). Yet neither trust nor contractual agreements, in isolation, may be enough to secure long-term cooperation. On the one hand, contracts, though important, cannot address all of the contingencies that might develop in a relationship (see Bernheim and Whinston, 1998). This makes it necessary to cultivate trust (cf. Dasgupta, 1988; Parkhe, 1998). On the other hand, it may be crucial for the parties not to underestimate the need to "get it in writing" (e.g., Nye, 1 988; Berger, 1997; Drake, 1999).

Some theorists (Sitkin, 1995; Das and Teng, 1998; Wicks, Berman, and Jones, 1999) have suggested that a mix of formal and informal structures is often necessary to manage complex relationships. According to Sitkin (1995), formal structures can simultaneously manage risk and uncertainty while furthering the development of trust. Using contracts to promote cooperation, for instance, might provide a foundation for future interactions and future cooperation. This, in turn, can help build trust. In contrast, others have suggested that it may be difficult to rely on contracts and trust simultaneously to deal with risk and uncertainty. Bernheim and Whinston (1998), Sitkin and Roth (1993), and Ghoshal and Moran (1996) suggested that the existence of formal structures can diminish the viability of informal structures. Several other authors have also alluded to the possibility that using contracts might undermine the development of trust (e.g., Shapiro, Sheppard, and Cheraskin, 1992; Sitkin and Roth, 1993; Lewicki, McA llister, and Bies, 1998). To clarify the effects of contracts on trust, we conducted two experiments to investigate whether the use or the type of a contract might inhibit or facilitate trust development.

Business Services Industry

The effects of contracts on interpersonal trust

Administrative Science Quarterly, Sept, 2002 by Deepak Malhotra, J. Keith Murnighan

Find Research Guides for:

Find Featured Titles for: Technology

Most Popular Articles in Business

Most Popular Publications in Business