Does Reliability Pay? How Reputation Can Affect Transaction Governance Investments

Abstract

The role of trust in economic exchange is ill-defined. Trust between alliance partners is argued to sometimes be an alternative to costly governance mechanisms and can therefore lead to superior performance. On the other hand, relying on anything but investments to secure credible commitment to deterrence is described as myopic. This paper explores a middle ground where, in the context of a reputation network, governance costs can decline without the strict necessity of intentional trust. Using an experimental approach, we show that reputation effects lead to significant advantages for reliable players in terms of offers to ally and the quality of those offers. These advantages resulted in lower governance costs and better performance.