Trust is an important factor for managing transaction costs within interorganizational relationships (IORs). Research on trust indicates that separate dimensions of trust arise from a partner’s competence (i.e., technical skills, experience, and reliability) and integrity (i.e., motives, honesty, and character), and that these dimensions have potentially unique effects. Because scholars rarely apply this distinction within IOR research, past studies may have masked important relationships involving competence- and integrity-based trust. In response, we build and test theory that explains how competence- and integrity-based trust have asymmetric effects on different kinds of transaction costs. In particular, we build on theory that describes how parties process positive and negative information about others’ behavior to predict that integrity-based trust in IORs is more potent for reducing transaction costs than is competence-based trust. We also theorize that building strong IORs requires more up-front investment with competence-based but not with integrity-based trust. By applying meta-analytic structural equation modeling to data on 37,366 IORs drawn from 150 samples, we find that integrity-based trust is about 10 times more effective at reducing these costs. A key implication is that managers seeking to improve the efficiency of their IORs may do well by performing competently, but they can do even better by building perceptions of integrity.
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