Trust as a Shift Parameter in the Extended Transaction Cost Framework – A First Application to the Liquefied Natural Gas Industry

This paper provides an empirical analysis that examines the effect of both, transaction characteristics and the institutional environment on the choice of governance. Using a dataset of 237 corporate-specific value chains in the global LNG industry, we introduce inter-organizational trust as a shift parameter. First, following transaction cost economics (TCE), it is hypothesized that specific investments under uncertainty provide incentives to integrate vertically. Second, it is argued that inter-organizational trust changes the relative costs of vertical integration and non-integration and supports less hierarchical governance modes. These economic relationships are tested based on probit and ordered probit models. Estimation results provide broad support for TCE by showing that relationship-specific investments in an uncertain environment drive LNG companies to invest in successive stages along the value chain. The presence of inter-organizational trust increases the likelihood of less hierarchical governance modes. The consideration of a shift parameter further enhances the explanatory power of the model supporting the need for empirical studies accounting for both, transaction cost variables as well as variables capturing dynamics in the institutional environment