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 II

National Chengchi University – NCCUApril 2011

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Overview

1. 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

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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

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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)

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Bringing rational choice models and empirical research closer together

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Some theory

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“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)

Fritz Stern,Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 1

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“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)

Fritz Stern,Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 2

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Trust Game as a stylized model of exchange

Trustee (supplier)

Trustor (buyer)

No trust Trust

HonorAbuse

2

1

R

R

2

1

T

S

2

1

P

PS1 < P1 < R1

P2 < R2 < T2

No trustNo trust TrustTrust

Abuse Honor

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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

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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.

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.

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Embeddedness mechanisms

Dyadicembeddedness

Networkembeddedness

Learning Common history of past interactions:information about the partner from own experiences

Information from third parties about their past experiences with the partner

Control Expected future interactions:opportunities for conditional cooperation via, e.g., “tit for tat”

Opportunities for conditional cooperation involving third parties: “voice” (reputation effects)

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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”

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“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.

Fritz Stern,Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 1Trust and Embeddedness

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“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).

Fritz Stern,Gold and Iron: Bismarck, Bleichröder, and the Building of the German Empire – 2Trust and Embeddedness

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Available formal theories

Dyadicembeddedness

Network embeddedness

Learning Adaptive learning models;information diffusion models

Learning and control

Models for repeated games with incomplete information

Control Models for repeated games with complete information

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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)

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Empirical evidence

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

Advantages Disadvantages

Survey Actual interactions Measurement problems; less control over variables

Lab experiment

Control over incentives and embeddedness variables

Abstract; external validity

Vignette study

Less abstract than lab experiments; control over variables

Hypothetical interactions; lack of “incentive compatibility”

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Evidence on effects ofdyadic 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

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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

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• 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

Survey: variables and measurements I

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• Control variables: • Transaction characteristics (e.g., specific

investments, uncertainty, volume)

• Marginal costs of contracting

• Characteristics of buyer and supplier, including respondent characteristics

Survey: variables and measurements II

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• 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”

Investments in contracting: assumptions I

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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

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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

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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

Hypotheses on effects of dyadic embeddedness II

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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)

Hypotheses on effects of dyadic embeddedness III

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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

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Evidence on effects ofdyadic embeddedness:

A vignette study onbuyer-supplier relations

More information:• Buskens & Raub (2002) Embedded Trust,

Advances in Group Processes 19: 167-202

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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

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vignette number: xxx

The transaction concerns

a product: - about which your firm has only very limited expertise.

- for which there are no alternative suppliers on the market.

a transaction: - with a small volume, namely, less than US$ 5.000,= on a yearly basis.

- where extra investments by your firm are not necessary.

a supplier: - from the Netherlands.- from whom your firm knows some business

partners, but your firm does not do business with them.

- with whom your firm has had a relationship in which minor problems sometimes occurred.

- with whom your firm expects to do business for a long period.

Example of a vignette

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Buyer-supplier vignettes: variablesVariable Value Text

Volume 0 1 2

A transaction with a small volume, namely less than US$ 5.000 on a yearly basis. A transaction with a considerable volume, namely, about 5% of the total purchase volume of your firm. A transaction with a very large volume, namely, 18% of the total purchase volume of your firm.

SpecificInvestments

01

2

A transaction for which extra investments by your firm are not necessary.A transaction for which your firm has to make small investments, such as investments in specific machines and equipment. A transaction for which your firm has to make considerable in-vestments, such as investments in specific machines and equipment.

Uncertainty 012

A known product about which your firm has the required expertise.A known product but one about which your firm has only limited expertise.A brand new product about which your firm has only very limited expertise.

Past 012

A supplier with whom your firm has never done business before.A supplier with whom your firm has a relationship in which minor problems occurred.A supplier with whom your firm has a long and successful relationship.

Future 01

It is uncertain how long your firm will continue with the supplier.Your firm expects to do business for a long period with the supplier.

Degree 01

2

You do not know any business partners of the supplier.You know some business partners of your supplier, but your firm does not do business with them.You do business with other business partners of the supplier.

Exit opportunities

012

A product for which there are no alternative suppliers on the market.A product for which there are some alternative suppliers on the market.A product for which there are many alternative suppliers on the market.

Country 01234

A supplier from Eastern Europe.A supplier from Japan.A supplier from the United States.A supplier from Germany.A supplier from the Netherlands.

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• 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

Buyer-supplier vignettes: variables and measurements I

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• 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)

Buyer-supplier vignettes: variables and measurements II

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• 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

Buyer-supplier vignettes and survey on IT-transactions

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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

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Evidence on effects ofnetwork 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

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• 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

Survey: variables and measurements III

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• 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)

Survey: variables and measurements IV

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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

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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

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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”?

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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

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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

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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).

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Variables to be manipulated and related hypotheses

Sanction opportunities w.r.t. third parties

Buyer’s sanction opportunities

Control

Prior third-party experiences

Prior buyer’s experiences

Learning

Network EmbeddednessDyadic Embeddedness

• 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)

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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.

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A pair of vignettes• You can buy a car for $4000.

• You never bought a car from The Autoshop before.

• You will move to the other side of the country in a few weeks.

• The Autoshop is an unknown garage in your neighborhood.

• As far as you know, none of your friends have bought a car from The Autoshop before.

• You do not have a close social link with the owner of The Autoshop.

• You can buy a car for $4000.

• You bought a car from The Autoshop before and you were satisfied.

• You do not expect to move out of town soon.

• The Autoshop is a well-known garage and has many customers in your neighborhood.

• You have friends who bought a car from The Autoshop before and they were satisfied.

• The owner of the garage and you are members of the same football team.

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Experimental design• Choices of pairs

• Price is constant within a pair (only for interactions)

• No “ordered” pairs (not too easy)

• Between 2 and 4 variables that differ (not too

complex)

• Ten pairs per subject

• Considerable variation in comparisons within

subjects

• Ultimately 125 students rating 1249 vignettes

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Statistical model• Random utility model.

• Probit model on choices for vignettes.

• Independent variables are the differences between the values at the vignettes (0: type of embeddedness to same on two vignettes, 1 or -1: type of embeddedness present on one vignette but not on the other)

• Coefficients are interpretable as indicators for the increase in utility assigned to a vignette related to the given type of embeddedness

• Standard errors modified for clustering (alternatively multilevel analysis could have been done)

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Results: main effects

All Chicago Utrecht TilburgPastFutureDensityIndegreeOutdegree

1.09**0.57**0.71**0.83**0.26**

0.99** 0.61** 0.67** 0.77** 0.18

1.11** 0.61** 0.73** 0.89** 0.28*

1.39** 0.30 0.73** 0.86** 0.51*

N 1249 400 720 129

** and * represent two-sided significance at p < 0.01 and p < 0.05 respectively.

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Results: interaction effectsAll Chicago Utrecht Tilburg

PastFutureDensityIndegreeOutdegreePast x futureFuture x outdegreeFuture x densityOutdegree x densityOutdegree x price

1.05**0.45**0.74**0.83**0.46**0.11

-0.040.19

-0.21-0.13

0.92** 0.44 0.73** 0.76** 0.34 0.19 0.07 0.09-0.18-0.19

1.12** 0.52** 0.73** 0.89** 0.40**-0.00-0.06 0.24-0.22 0.03

1.39** 0.30 0.73** 0.86** 0.51* 0.53-0.15 0.16 0.38 0.75*

N 1249 400 720 129

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Additional analyses

• No differences between sessions

• No differences related to timing of a pair of vignettes or time spent on a decision

• No effects of age, gender, field of study

• Outdegree has larger effect for subjects who are more concerned about “reputation” issues

• Subjects with knowledge of game theory tend to value control variables higher

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Conclusion

• Support for main effects of embeddedness

• control and learning

• dyadic and in networks

• No support for interaction effects

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Discussion

• Motivation of behavior (no direct incentives and students might not be experts)

• Interpretation of variables• Future: moving has more side-effects than

loss of sanction possibilities alone

• Possible extension

• Similar experiment with experts

• Moving to an abstract laboratory

experiment

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Overview of Results

Not tested+Incentives

++Dyadic control

+Network control

+learning and control hard to disentangle

Network learning

++Dyadic learning

Used-car vignettes

Buyer-supplier vignettes

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Summary of empirical evidence

SurveyVignette

studyLab

experiment

Dyadiclearning • Consistent support for dyadic learning

and control effects on trust of trustorDyadiccontrol

Network learning

• Quite some support for network learning effects on trust of trustor

• Hardly support for network control effects on trust of trustor

• Consistent support for network control effects on trustworthiness of trustee

Networkcontrol

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Additional slides

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Additional slides onsurvey on IT-transactions

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• Nationally representative survey on the purchase of IT-products (hard- and software) by Dutch SMEs

• Data collection via buyers• CATI-interview (selection of transaction)• Structured questionnaire, usually

administered via site visit• Additional archival information, sometimes

including a rough content analysis of contracts

• Data quality• total response rate: 58%• non-response not selective• low partial non-response

Survey on IT-transactions: data collection I

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• ‘Average transaction’:• a product worth 50,000 US-$• purchased by a firm with ca 80 employees• negotiating and contracting required ca 5

mendays of buyer’s employees…• and involved ca 2 divisions of buyer’s firm• for about two thirds of buyers, transaction

is of ‘great’ or ‘very great’ importance for their IT-situation

Survey on IT-transactions: descriptives

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Future

Survey on IT-transactions: descriptives

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• Transaction characteristics (indicators for trust problems, opportunism problems, and other risks associated with the transaction), e.g., monitoring problems, switching costs, importance of durability of product, importance of product for profitability buyer, volume of transaction

• Costs of contractingE.g., in-house legal expertise

• Dyadic embeddedness• Prior transactions with the supplier

(duration, frequency, volume, satisfaction)• Expected future business (frequency,

volume)

Survey on IT-transactions: variables I

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• Network embeddedness• Indicators for density of buyer’s network of

business contacts• Relations of buyer with other clients of

supplier• Availability of and relations of buyer with

other suppliers

• Various control variablesE.g., ‘demography’ of buyer and supplier, other suppliers involved in transaction…

Survey on IT-transactions: variables II

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• Ex ante management: search and selection• Investments in search

E.g., mendays, departments involved• Extensive and intensive search

E.g., number and specificity of offers, number and kind of information channels

used• Ex ante management: contractual planning

• Investments in negotiating and contractingE.g., mendays, departments involved

• Legal, financial, and technical issues addressed during negotiations and in the contract

Survey on IT-transactions: variables III

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• Ex post management – contract execution• Supplier performance, ex post problems

(type and seriousness)• conflict resolution (type and seriousness of

sanctions, ‘legal’ vs. ‘extra-legal’)

• New business between buyer and supplier after focal transaction

Survey on IT-transactions: variables IV

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Independent Variables Hypothesis Coefficient |t-value|

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3.33–0.12**–Past × Future

1.28 0.05?Future

3.12–0.09**–Past (1 = yes)

Dyadic Embeddedness

|t-value|CoefficientHypothesisIndependent Variables

Standardized Coefficients from the Ordinary Least Squares Regression on management

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TABLE 2Three-Stage Least Squares Regression Analysis of EX POST

PROBLEMS(1205 transactions of 775 buyers)

-0.085** (0.034)

-0.088** (0.034)

–EXIT NETWORK

-0.054* (0.028)

-0.052* (0.028)

–VISIBILITY

-0.055* (0.029)

-0.068** (0.029)

–SECTOR DENSITY

-0.059* (0.035)

-0.063* (0.035)

–DEGREE

0.066* (0.032)

0.054~ (0.031)

–EXPECTED FUTURE

-0.206*** (0.038)

–SATISFACTION*

-0.045~ (0.033)

-0.042 (0.033)

?PAST

Embeddedness characteristics

Model 2Model 1HypothesisVariable

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Survey on IT-transactions: why no effects of network embeddedness on buyer behavior?

• Endogeneity of network embeddedness: before buying, buyers search for information on product and supplier, with network embeddedness changing as a by-product of search

• Unmeasured variance in the trust problem: network embeddedness seemingly measures a part of the trust problem

• Sample selectivity: buyers avoid transactions with “large” trust problems when network embeddedness is low

• Supplier effects on investments in contracting: suppliers may contract more “carefully” with well-embedded buyers

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Additional slides onvignette study on

buyer-supplier relations

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Buyer-supplier vignettes: regression analysis of INVESTMENTS IN CONTRACTING

Independent variable Hypothesis Model 1 Model 2

VolumeSpecific investmentsUncertaintyPastFutureDegreeExit opportunitiesInstitutional embeddednessPast x FutureConstant

+++?

0.63**0.16**0.16*

-0.14*-0.02-0.08~-0.04-0.10**

-1.27

0.64**0.14*0.17**

-0.13*-0.02-0.09*-0.04-0.10**-0.32**-1.26

Explained varianceNumber of subjectsNumber of observations

0.4940

348

0.5140

348

**,*, and ~ represent two-sided significance at respectively p < 0.01, p < 0.05, and p < 0.10 based on Huber standard errors modified for clustering.