How Contracts Influence Trust and Distrust

Despite the scholarly interest in contracts and trust governing interorganizational relationships, an understanding of how contracts influence trust remains limited by the way in which the interaction between the two constructs is conceptualized. By bringing together recent advances in the literature on interorganizational governance, I consider (a) the controlling and the coordinating dimensions of formal contracts, (b) trust and distrust as two distinct constructs, and (c) both the calculative and noncalculative aspects behind the development of trust and distrust. Drawing upon information-processing theory, I develop a series of propositions about how each contractual dimension influences the development of trust and distrust by inducing specific information-processing and decision-making mechanisms. My theoretical analysis leads me to discuss the trade-offs inherent in governance choices, and I discuss the implications of my propositions for the literature on interorganizational governance mechanisms. Interorganizational relationships, such as alliances, supply chain agreements, joint ventures , or outsourcing partnerships, have become increasingly important for achieving competitive advantage (Parmigiani & Rivera-Santos, 2011). The literature has suggested that two main governance mechanisms are at play in interorganizational relationships (see Cao & Lumineau, in press, for a review). A first stream focuses on the role of the formal contract as a safeguard against opportunism and conflict (Lumineau & Quélin, 2012; Mesquita & Brush, 2008). A second stream focuses on relational governance, and trust in particular, as a Acknowledgments: The author is grateful to the action editor, Steven Michael, and the reviewers for their valuable suggestions.