It is generally assumed that improved outcomes accompany the use of trust as a governance mechanism in an interfirm relationship. Briefly, trust is a social lubricant that reduces the friction costs of existing trade and/or serves to increase the scope of trade. In contrast to this universalistic view, we posit that the performance of trust-based governance is contingent on the ability of trading partners to "read" each other and learn about counterpart behavior. These information-processing abilities allow firms to assess partner trustworthiness better, which reduces the risk of misplaced trust. The increased efficacy of communication and learning from one another also enables them to better capitalize from the adaptation and revision possibilities uncovered through trust-based governance during the task-execution phase. Given the central role of these cognitive requirements, we assess these contingent effects with data from a knowledge-intensive task setting. Using a sample of 129 firms that have engaged outside contractors on client-sponsored R & D projects, we find strong support for our thesis. Specifically, we find that trust-based governance has a larger positive impact on task performance when the client is more skilled at understanding the outsourced tasks at hand, the task itself requires skills that are relatively more readily taught (less tacit), and the task itself is organized in parallel with work being done at the contractor as well as the client. As a corollary, we also find that firms adopt trust-based governance to a greater extent as these information-processing abilities increase, as well as with the colocation of the contractor and client. Suggestions for engineering trust-based governance are offered.
- Information Processing