Calculative Trust and Interfirm Contracts

Abstract

Interfirm contracts are plagued by opportunism arising from exchange hazards that increase the seller’s gains from holdup in fixed price contracts. These exchange hazards are higher when the seller can engage in unverifiable deliberate obfuscation. Although cost-plus contracts reduce holdup losses, they suffer from cost inefficiency. Past research has underscored the importance of trust as a control instrument to mitigate losses from exchange hazards, especially social relational trust that develops from past experiences. However, trust can also be calculative when it develops from the expectation of future economic gains to the buyer-seller dyad. We identify two dyadic mechanisms that generate calculative trust and curtail the likelihood of cost-inefficient behavior in cost-plus contracts. These mechanisms include future potential and bilateral reputation capital for cost containment. Analysis using probit estimations on 149 information technology outsourcing contracts for the period 1998 to 2005 suggests that calculative trust increases the likelihood of cost-plus contracts. Thus, calculative trust can mitigate inefficiencies in interfirm contracts. This paper was accepted by Shiva Rajgopal, accounting.

An emerging market perspective of what makes professional service firms successful

“…Under such a circumstance, the partners, due to the ambiguity of trust tend to exhibit coopetitive rather than collaborative behaviours. This increases opportunistic and calculative behaviours (Susarla et al, 2020), stifles innovation, and thus, impact negatively on the success of the partnership. 4.4.2 Impact of communication behaviour of partners on partnership success.…”

“…Social exchange is a dyadic exchange between at least two partners geared towards the achievement of some benefits. Partners in such dyadic relationships are often exposed to exploitation and opportunistic behaviours from one another, underscoring the need for them to use calculative trust strategies to cushion themselves against the risks their relationship exposes them to Reusen and Stouthuysen (2020), Susarla et al (2020). The cost, which is viewed as the alternative opportunities or activities foregone by individual actors is a common feature in social exchanges.…”

“…Social exchanges involve the principle that one person does another a favour, and while there is a general expectation of some future return, its exact nature is not stipulated in advance (Blau and Scott, 1962). Hinging on the element of trust and reciprocity, the partners of a social exchange return the favour or disfavour of one another (Susarla et al, 2020;Cropanzano et al, 2017). Inferring from the social exchange theory perspective, it can be noted that partnerships are characterized by behavioural characteristics that differentiate their exchange relationships from other traditional (conventional) organizational relationships.…”

“…Thus, from a transaction cost perspective, an individual or firm may venture into a partnership because of the economic and personal benefits they seek to derive from the partnership relationships. Quite often, the anticipated economic and personal motive significantly shapes the partnership relationship behaviour of stakeholders (Reusen and Stouthuysen, 2020;Susarla et al, 2020;Cook et al, 2013). For instance, knowledge transfer and other information exchange behaviours between partners in these strategic alliances will improve if the partners trust each other and where its occurrence is likely to reduce costs and enhance the fortunes of partners (Lascaux, 2020;Susarla et al, 2020;Milagres and Burcharth, 2019).…”

Expl(Ai)Ned: The Impact of Explainable Artificial Intelligence on Cognitive Processes

“…Against this background, organizations that intend to transfer domain knowledge extracted by AI system from (Big) Data to employees, may be well advised to (i) employ feature-based explainability techniques and (ii) foster users' trust in the system's predictive performance. In order to achieve the latter, future research should focus on how this trust is built, similar to recent work exploring how trust is generated to improve economic efficiency in human-human collaboration (Susarla et al 2020). As a final word of caution on this implication, we want to point out that there may also be a dark side to learning from explanations.…”