2 - Trust and organisational efficiency

Summary

The possibility was raised in the last chapter that intermediate forms of coordination are often associated with superior performance, by combining the best of both worlds, of markets in giving flexibility and of hierarchies in giving maximum control. This chapter has two broad tasks to achieve. The first is to clarify what is meant by good or bad performance, in order to enable us to make an empirical link between ACR—OCR trading patterns on the one hand and corporate performance or industrial competitiveness on the other. The concept of performance to be discussed evolves around a particular notion of the firm as an organisation with a varying degree of capability in enhancing X-efficiency. Transaction costs are incurred in part to invest in such capability.

The second task in the chapter is to examine the concept of trust which is considered central to our understanding of how coordinating mechanisms differ under ACR and OCR. A typology of trust is developed, by making a distinction among three types of trust, namely ‘contractual trust’, ‘competence trust’ and ‘goodwill trust’. Mutual trust between trading partners is seen to entail both efficient outcomes (due to freer information disclosure and commitment) and inefficient outcomes (due to greater non-pecuniary switching costs).