The impact of institutional trust ontransaction cost of the firm

While transaction cost economics insists that noncalculative trust cannot be considered to determine cost-efficient governance structure, more and more interests in the role of institutional environment affecting governance structure have recently grown in the context of institutional theory. Based on these two theories together, this study suggests that trust can play an important role in two separate stages. In the first stage where no reputation of a firm exists, only noncalculative institutional trust plays and it determines initial level of trust. In the second and later stages where organizational reputation is being formed, calculative trust can be created and affect governance structure with a partner firm. If a firm can correctly evaluate the level of trust that the firm should recognizeagainst a partner firm, the firm may minimize transaction cost over time and gain competitive advantages.