| Summary: | In this paper we investigate the relationship between supplier trust in the buyer and transaction
costs, information sharing, and re[ation-specific investments in a sample of 453 supplier automaker
exchange relationships in the U. S., Japan, and Korea. Our findings indicate that trust
reduces transaction costs and increases information sharing in supplier-buyer relationships.
Moreover, the findings suggest that the economic value created for transactors, in terms of lower
transaction costs, may be substantial. In particular, we found that the automaker with the least
trusting supplier relations spent twice as much of its face-to-face interaction time with suppliers
on 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 for
the least trusted automaker compared to the most trusted automaker. Finally, we argue that trust
is unique as a governance mechanism because it not only minimizes transaction costs, but also
has a mutually causal relationship with other behaviors (i.e. information sharing. buyer technical
assistance) that create value in the exchange relationship. Other governance mechanisms (e. g..
contracts. financial hostages) are necessary costs incurred to prevent opportunistic behavior but
do 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 of
competitive advantage.
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