Using Complementary Research Designs: The Example of Effects of Social Embeddedness on Trust and Cooperation

1. Using Complementary Research Designs: The Example of Effects of Social Embeddedness on Trust and Cooperation Werner Raub Workshop on Social Theory, Trust, Social Networks, and Social Capital IINational Chengchi University – NCCUApril 2011

2. Overview • Theory • Trust problems in economic exchange • Embeddedness effects on trust 2. Empirical evidence from studies using different and complementary research designs • A survey on buyer-supplier relations • A vignette study on buyer-supplier relations

3. Background: a rational choice perspective on embeddedness effects “… while the assumption of rational action must always be problematic, it is a good working hypothesis that should not easily be abandoned. What looks to the analyst like nonrational behavior may be quite sensible when situational constraints, especially those of embeddedness, are fully appreciated […] My claim here is that however naive that psychology [of rational choice] may be, this is not where the main difficulty lies – it is rather in the neglect of social structure.” Mark Granovetter (1985) Economic Action and Social Structure: The Problem of Embeddedness

4. Empirical evidence on embeddedness effects from complementary research designs • Aim: use complementary research designs (survey, vignette study, lab experiment) for multiple tests of the same hypotheses (cf.: triangulation, cross validation) • Similar perspective: • Sociology: J.H. Goldthorpe (1996) The Quantitative Analysis of Large-scale Data Sets and Rational Action Theory: For a Sociological Alliance, ESR 12 • Economics: G.W. Harrison & J.L. List (2004) Field Experiments, JEL 42(4)

5. Bringing rational choice models and empirical research closer together

6. Some theory

8. Fritz Stern, Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 1 “In the private banking world of those days, personal ties were of the greatest importance. Common ventures depended on mutual trust, and that trust had to be established by direct personal knowledge.” (p. 9)

9. Fritz Stern, Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire– 2 “In Bismarck’s world, then, Bleichröder was a welcome supplement to official channels (…) Bismarck used him freely and continuously as a special emissary, as an additional and informal link to foreign powers and statesmen. Statesmen always like to have a multiplicity of contacts – to solicit reactions, to convey hints, to reinforce threats or allay fears.” (p. 311)

10. Trustor (buyer) Trust No trust No trust Trust Trustee (supplier) Honor Abuse Abuse Honor S1 < P1 < R1 P2 < R2 < T2 Trust Game as a stylized model of exchange

11. Substantive interpretation of the Trust Game for buyer-supplier relations Moves of the trustor (buyer) • No trust: safeguard transaction with an extensive but costly contract • Trust: use less extensive and less costly contractual safeguards Moves of the trustee (supplier) • Honor trust: deliver appropriate quality and deliver in due time • Abuse trust: deliver inferior quality and/or deliver with a delay

12. Extensions of the Trust Game • More than only two moves for trustor and trustee (e.g., Investment Game) • Incomplete information of the trustor on incentives or opportunities of trustee for abusing trust • Ex post-problems due to incompetence of trustee or unfavorable external contingencies rather than abuse of trust (opportunism) • Incentives and opportunities for “defection” of trustor (e.g., delayed payment) • Etc.

13. Relation with Stern’s historical study on Bismarck and his banker Bleichröder • Stern claims that interactions between private bankers involve trust problems. • Stern likewise claims that interactions between states and between politicians involve trust problems.

14. Embeddedness mechanisms

15. Research problem • Distinguish between different embeddedness effects • theoretically • empirically • We neglect: • strategic network formation: embeddedness is assumed to be exogenous • “non-selfish utility”: focus on trust as a result of “enlightened self-interest”

16. Fritz Stern, Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 1 Trust and Embeddedness “In the private banking world of those days, personal ties were of the greatest importance. Common ventures depended on mutual trust, and that trust had to be established by direct personal knowledge.” (p. 9) Note Stern’s claim: dyadic embeddedness affects trust.

17. Fritz Stern, Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire– 2 Trust and Embeddedness “In Bismarck’s world, then, Bleichröder was a welcome supplement to official channels (…) Bismarck used him freely and continuously as a special emissary, as an additional and informal link to foreign powers and statesmen. Statesmen always like to have a multiplicity of contacts – to solicit reactions, to convey hints, to reinforce threats or allay fears.” (p. 311) Note Stern’s claim: Network embeddedness allows for learning and control (informal reciprocity).

18. Available formal theories

19. Examples of hypotheses Effects of dyadic embeddedness: • Trust increases with positive experiences of trustor with trustee (learning effect) • Trust and trustworthiness increase with expected future transactions (control effect) Effects of network embeddedness: • Trust increases with positive information of trustor on trustee from third parties (learning effect) • Trust and trustworthiness increase with sanction opportunities of trustor (e.g., “voice”) involving third parties (control effect)

20. Empirical evidence

21. Evidence from a survey, a lab experiment, and a vignette study

22. Evidence on effects of dyadic embeddedness: A survey on IT-transactions More information: • Batenburg, Raub & Snijders (2003) Contacts and Contracts: Dyadic Embeddedness and the Contractual Behavior of Firms, Research in the Sociology of Organizations 20: 135-188

23. A survey on IT-transactions Data on the purchase of hard- and software, standard and complex products • ca 1000 transactions (“Trust Games”) • ca 800 buyers (trustors): Dutch SMEs • 600+ suppliers (trustees) • various replications and extensions of the study in the Netherlands and Germany

24. Survey: variables and measurements I • Trust of buyer: “Lack of trust” measured by buyer’s costly INVESTMENTS IN CONTRACTING with supplier (person-days and departments involved, financial and legal clauses and technical specifications included in contract) • Dyadic learning:(positive) experiences of buyer from previous transactions with supplier – PAST • Dyadic control: expectations of buyer on future transactions with supplier – FUTURE

25. Survey: variables and measurements II • Control variables: • Transaction characteristics (e.g., specific investments, uncertainty, volume) • Marginal costs of contracting • Characteristics of buyer and supplier, including respondent characteristics

26. Investments in contracting: assumptions I • IT transactions are associated with risks • Focus on risks of the buyer (such as delayed delivery, inferior quality etc.) due to: • opportunistic behavior of supplier • incompetence of supplier • external contingencies • Contracting as a device to mitigate risks: • reduction of incentives for opportunistic behavior of supplier • compensation for buyer if risks “materialize”

27. Investments in contracting: assumptions II Core assumptions for deriving hypotheses: • Investments in contracting are costly and actors will economize on these costs • Investments in contracting will increase in risks

28. Hypotheses on effects of dyadic embeddedness I Effects of a positive past relationship: • Dyadic learning: reduced probability of supplier incompetence • Also: mutual relationship specific investments • Availability of costless safeguards from prior transactions (e.g., reuse of contract for a prior transaction) • Good working relations between employees of the two firms Decreasing investments in contracting

29. Hypotheses on effects of dyadic embeddedness II Two effects of expected future transactions: • Reciprocity effect: conditional cooperation becomes an alternative for costly investments in contracting • Decreasing investments in contracting • Reusability effect: investments in contracting can be (partly) reused for future transactions (e.g., reuse of adapted version of the contract) Increasing investments in contracting Note: reusability effect larger when contractual safeguards are not yet available, i.e., larger for transactions without prior business between buyer and supplier

30. Hypotheses on effects of dyadic embeddedness III Without additional assumptions on strength of reciprocity effect and reusability effect: no hypothesis on main effect of FUTURE on INVESTMENTS IN CONTRACTING • Due to larger reusability effect for transactions without prior business between buyer and supplier: negative interaction effect PAST x FUTURE on INVESTMENTS IN CONTRACTING (dyadic control)

31. Survey: empirical evidence on effects of dyadic embeddedness • Robust result for various statistical models, for alternative operationalizations of variables, and controlling for transaction characteristics, marginal costs of contracting, and characteristics of buyer and supplier: INVESTMENTS IN CONTRACTING decrease with: • PAST: positive past experiences of buyer • PAST x FUTURE: expected future transactions if positive past experiences exist Support for hypotheses on dyadic learning and control effects

32. Evidence on effects of dyadic embeddedness: A vignette study on buyer-supplier relations More information: • Buskens & Raub (2002) Embedded Trust, Advances in Group Processes 19: 167-202

33. Data: a vignette study on buyer- supplier relations • Respondents: 40 purchase managers of Dutch medium-sized and large companies • Judgments on 348 virtual transactions (= vignettes; 8-10 vignettes per respondent) • Data on • transaction management • transaction characteristics • dyadic embeddedness • network embeddedness • characteristics of purchase managers

34. Example of a vignette

35. Buyer-supplier vignettes: variables

36. Buyer-supplier vignettes: variables and measurements I • Trust of buyer: “Lack of trust” measured for each vignette by buyer’s costly INVESTMENTS IN CONTRACTING with supplier (duration of negotiation with supplier and departments of buyer involved in negotiations) • Dyadic learning: (positive) experiences of buyer from previous transactions with supplier – PAST • Dyadic control: expectations of buyer on future transactions with supplier – FUTURE

37. Buyer-supplier vignettes: variables and measurements II • Control variables: • Transaction characteristics (e.g., specific investments, uncertainty, volume) • Characteristics of buyer and supplier, including respondent characteristics (e.g., experience with transactions like described on vignettes)

38. Buyer-supplier vignettes and survey on IT-transactions • Note: • Vignette study on buyer-supplier relations and survey on IT-transaction allow to test same hypotheses on effects of dyadic embeddedness with two different but complementary data sets based on different designs

39. Buyer-supplier vignettes: empirical evidence on effects of dyadic embeddedness • Robust result for various statistical models and controlling for transaction characteristics as well as respondent characteristics: INVESTMENTS IN CONTRACTING decrease with: • PAST: positive past experiences of buyer • PAST x FUTURE: expected future transactions if positive past experiences exist Renewed support for hypotheses on dyadic learning and control effects with data based on different research design

40. Evidence on effects of network embeddedness: survey on IT-transactions More information: • Rooks, Raub & Tazelaar (2006) Ex Post Problems in Buyer-Supplier Transactions, Journal of Management and Governance 10: 239-276

41. Survey: variables and measurements III • Network embeddedness: • DEGREE: ties of buyer with other buyers of supplier • SECTOR DENSITY: contacts among firms in business sector of buyer • VISIBILITY of supplier in the market (as assessed by buyer) • Note: these are indicators for network learning as well as network control opportunities (“voice opportunities”) of buyer

42. Survey: variables and measurements IV • Trustworthiness of supplier: • PERFORMANCE of supplier, e.g., delivery in due time, quality of product, quality of after-sales service (Rooks et al. (2006): EX POST PROBLEMS instead of PERFORMANCE)

43. Survey: empirical evidence on effects of network embeddedness on trustworthiness of supplier • Robust result for various statistical models and controlling for transaction characteristics, buyer’s INVESTMENTS IN CONTRACTING, and characteristics of buyer and supplier: PERFORMANCE of supplier increases (i.e., EX POST PROBLEMS decrease) with network embeddedness (DEGREE, SECTOR DENSITY, VISIBILITY) Support for hypotheses on network control effects on supplier (trustee) behavior

44. Survey: empirical evidence on effects of network embeddedness on trust of buyer • Robust result for various statistical models, for alternative operationalizations of variables, and controlling for transaction characteristics, marginal costs of contracting, and characteristics of buyer and supplier: network embeddedness (DEGREE, SECTOR DENSITY, VISIBILITY) has no effect on buyer’s INVESTMENTS IN CONTRACTING No support for hypotheses on network learning or control effects on buyer (trustor) behavior

45. Puzzle • Suppliers seemingly react to incentives from network embeddedness (suppliers seemingly take reputation effects of their performance into account). • How to explain that buyers seemingly do not anticipate on this feature? • Data and/or measurement problems (including sample selectivity and endogeneity of network embeddedness)? • Lack of “strategic rationality”?

46. Another summary of the puzzle • Trustee reacts to trustor’s opportunities for • dyadic control and • network control • Focal trustor reacts to her own opportunities for dyadic control: she seemingly anticipates that trustee anticipates on effects of his present behavior on future behavior of focal trustor • Focal trustor does not react to her own opportunities for network control: she seemingly does not anticipate that trustee also anticipates on effects of his present behavior on future behavior of other trustors

47. Another vignette experiment: buying a used car More information: • Buskens, V. & J. Weesie (2000) An Experiment on the Effects of Embeddedness in Trust Situations: Buying a Used Car, Rationality and Society 12: 227-253

48. Buying a used car • Buyer chooses between trust or no trust (buy or not buy). • Trust gives the dealer the opportunity to honor or abuse trust (sell a decent or inferior car). In both situations he is better off than when trust would not be placed • Buyer gains from honored trust, but regrets trust if trust is abused. • Dealer earns an extra profit from abusing trust (too much money for a bad car).

49. Dyadic Embeddedness Network Embeddedness Learning Prior buyer’s experiences Prior third-party experiences Control Buyer’s sanction opportunities Sanction opportunities w.r.t. third parties Variables to be manipulated and related hypotheses • Trust increases with • positive own experiences (dyad)‏ • expected future transactions (dyad)‏ • positive information from third parties (network)‏ • sanction opportunities w.r.t. third parties (network)‏

50. The set-up of the vignettes • Pairs of vignettes including six variables. • Price • Past (own experience)‏ • Future (own expected future interactions)‏ • Density (general reputation)‏ • Indegree (friends experiences)‏ • Outdegree (own third-party sanction opportunities)‏ • Subjects compare pairs of situations to buy a used car. • Some additional questions.