Trust within the Organization: Integrating the Trust Literature with Agency Theory and Transaction Costs Economics

Abstract

ABSTRACT This study analyzes agency theory and transaction costs economics in contrast with the literature on trust to integrate the key concepts and assumptions of these theories. The authors use field data from one multinational corporation to illustrate that trust-embedded economic theories provide a richer explanation of intraorganizational relationship than trust-absent theories. Although the notion of trust has always been at the heart of the management field, in the last few years there has been an explosion of research on trust and its implications for the management of organizations. The interest in this topic has produced numerous books and a substantial number of articles in academic journals. Management scholars seem to be making a collective effort to understand what is trust and why it is important in different managerial settings such as interorganizational cooperation (Ring and Van de Ven, 1994), alliance governance structure (Gulati, 1995), and foreign subsidiary commitment (Kim and Mauborgne, 1993). Within the organizational development literature, the central place of trust in planned change has been widely recognized for both private and public organizations (Golembiewski, 1979; Carnevale, 1995). Some of the more recent management literature on trust has attempted to cast itself in direct opposition to other theories more heavily based in economics such as Agency Theory (AT) and Transaction Costs Economics (TCE). On one side, several scholars have stressed the criticality of building trust rather than manipulating the contextual environment with incentives and monitoring (Ghoshal and Moran, 1996; Perrow, 1986). In contrast, other scholars prefer the rational analysis of risk in order to alter individual payoffs and, therefore, be able to study calculative cooperation, independent of personal trust (Williamson, 1993). This division resembles the decades-old controversy about the nature of the human being such as the classical dichotomy suggested by McGregor's (1960) Theory X versus Theory Y. However, a few scholars have been able to merge economic theories with concepts drawn from sociology (Ouchi, 1980; Gulati, 1995). These authors highlight the role of trust within relationships e.g., the effects of socialization and familiarity. In this article, the authors analyze conceptually how the recent literature on trust relates to TCE and AT. They investigate the key concepts and assumptions of AT and TCE and the role that trust plays in them. Based on the analysis and comparison of these theories, the discussion will show that the study of trust and social capital provides insights that enrich and complement those of AT and TCE. They argue that the trust literature is not only fully compatible with these economic theories but also improves their descriptive and explanatory power. The authors also provide an illustration of how trust-embedded AT and TCE present a more accurate picture of relationships within an organization. This article is organized as follows. First, the authors will analyze the main characteristics of the literature on trust, At, and TCE in order to integrate the concept of trust within these economic theories. Then, they will briefly discuss the field research that they conducted within one multinational organization to study intraorganizational trust. Next, they will develop a model of trust within organizations, based on their prior analysis of the three streams of literature and illustrated with data from the field research. Finally, they will conclude with a discussion of the importance of building trust within organizations and explicitly incorporate the concept of trust into the theories studying business relationships between individuals. BRIEF REVIEW-OF THEORIES In this section, the authors will discuss some of the key ideas within the trust literature that have accumulated in the past few years. Then they will briefly analyze AT and TCE so that they will be able to investigate their similarities and differences with regard to the role of trust within organizations. …

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