The Economic Value of Trust in Supplier-Buyer Relationships

In this paper we investigate the relationship between supplier trust in the buyer and transactioncosts, information sharing, and re[ation-specific investments in a sample of 453 supplier automakerexchange relationships in the U. S., Japan, and Korea. Our findings indicate that trustreduces transaction costs and increases information sharing in supplier-buyer relationships.Moreover, the findings suggest that the economic value created for transactors, in terms of lowertransaction costs, may be substantial. In particular, we found that the automaker with the leasttrusting supplier relations spent twice as much of its face-to-face interaction time with supplierson 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 forthe least trusted automaker compared to the most trusted automaker. Finally, we argue that trustis unique as a governance mechanism because it not only minimizes transaction costs, but alsohas a mutually causal relationship with other behaviors (i.e. information sharing. buyer technicalassistance) that create value in the exchange relationship. Other governance mechanisms (e. g..contracts. financial hostages) are necessary costs incurred to prevent opportunistic behavior butdo 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 ofcompetitive advantage.