ArticlePDF Available

Credible Commitments: Using Hostages to Support Exchange

Authors:
... Much of the literature focuses on defence mechanisms that …rms can use to protect their knowledge from expropriation (e.g., Cohen et al., 2000;Katila et al., 2008). Here we take a complementary perspective and study organizational commitments that leading …rms can use to encourage knowledge sharing when appropriability hazards are present (Schelling, 1960;Williamson, 1983). Nypro was concerned that sharing its knowledge, though vital to the success of the alliance, would hurt its bargaining position in the alliance. ...
... The commitments that have been more extensively studied in economics are contractual or equitybased (e.g., Williamson, 1983;Oxley, 1997). Williamson (1983) considers a model where producers can make relationship-speci…c investments but such investments create the potential for hold-up. ...
... The commitments that have been more extensively studied in economics are contractual or equitybased (e.g., Williamson, 1983;Oxley, 1997). Williamson (1983) considers a model where producers can make relationship-speci…c investments but such investments create the potential for hold-up. He shows that, under some conditions, e¢ cient contracting can be achieved if the buyer posts a 'hostage' (such as a termination fee) that is delivered to the producer if the order is cancelled. ...
Article
Full-text available
We develop a model of knowledge sharing in alliances and alliance portfolios. We show that, once the issue of encouraging effective collaboration is put center stage, many standard intuitions of the learning race view and alliance portfolio literature are overturned or qualified. Partners engage in learning races in some cases, but exhibit “altruistic” behaviors in other cases. They may reduce their own absorptive capacity or increase the transparency of their own operations to facilitate their partner’s learning. In alliance portfolios, we show that not all substitutability between alliance portfolio partners is bad. We distinguish between substitutability in implementation and substitutability in rival benefits and show that the latter is conducive to knowledge sharing. Our work contributes toward putting the literature on learning alliances on a more solid foundation by emphasizing the importance of commitments that leading firms can make to encourage collaboration. This paper was accepted by David Simchi-Levi, business strategy.
... This work's finding is that by granting board voting membership to stakeholders, B&J's has spearheaded a departure from motivational credible commitments that rely on reciprocal bilateral exchanges (Williamson, 1983), and toward a form of imperative credible commitments (Shepsle, 1991), which represent a stringent form of commitment that is plausibly costlier compared to alternatives, yet they are warranted to increase the reliability of transactions with stakeholders who otherwise would be left with a circumstantial assurance of continuity. It is posited that a limited array of real-world transactions, despite knowingly being costlier, deserve credit as part of governance mechanisms whose feasibility may have been prematurely dismissed by TCE. ...
... Credible commitments are, more generally, a sort of governance mechanism which has the purpose of binding transacting parties to the fulfillment of agreements (North, 1993). The parties are bound by incentives stemming from the commitments pledged or the hostages held (North, 1993;Williamson, 1983Williamson, , 1984. Credible commitments are relevant when idiosyncrasy and frequency of transactions are significant, and, importantly, when the asynchrony between ex-ante commitment and ex-post contract execution increases uncertainty about the outcome of the agreement. ...
... Given the corporate status quo crystalized before the acquisition, non-equity stakeholders were entitled to certain benefits acknowledged by the three-part mission: 1) customers as the beneficiaries of premium ice cream; 2) employees and franchisees as the beneficiaries of sustainable financial growth; and 3) other external stakeholders, such as family farms and fair-trade suppliers, as the beneficiaries of value-led sourcing decisions (Ben & Jerry's Homemade Inc., n.d.c). Such a status quo put non-equity stakeholders like employees, customers, and suppliers in a transactional relationship with equity holders that conveyed a dual entitlement (Kahneman et al., 1986), and thus warranted a credible response to the expropriation hazards posed by the acquisition (Williamson, 1983). ...
Article
Full-text available
If board voting membership for stakeholders is inefficient and thus likely to be unfeasible, as Transaction Cost Economics (TCE) posits, How can Ben & Jerry’s (B&J’s) be accounted for? This question, overlooked by TCE scholars and stakeholder advocates alike, is answered in this paper. Shareholder-centric corporate boards are the only feasible option according to TCE. However, just as the U-form firm structure is costlier in terms of governing transactions than the M-form, yet the U-form is warranted when a more fine-grained follow-up on decisions is required and diversification is uncalled-for, stakeholder board voting membership may also be needed for the survival of transactions specific to social-purpose hierarchies, despite admittedly being costlier than proprietary, shareholder-centric hierarchies. This paper’s finding is that by granting board voting membership to stakeholders, B&J’s has spearheaded a departure from motivational credible commitments that rely on reciprocal bilateral exchanges, and toward a form of imperative credible commitments, which represent a stringent form of commitment that is plausibly costlier compared to alternatives, yet they are warranted to increase the reliability of transactions with stakeholders who otherwise would be left with a circumstantial assurance of continuity.
... The management and strategy literatures on interorganizational trust address the issue indirectly, implying that trusting partners will be motivated to do more business together, and as they work more together, will trust each other more, leading to more mutual cooperation (e.g., Heide & Miner 1992;Gulati 1995;Zaheer & Venkataraman 1995;Zaheer, McEvily & Perrone 1998;Vanneste, Puranam & Kretchmer 2014;Schilke & Cook 2015). Economic theories of hostage exchange (Williamson 1983) and dependence balancing (Heide & John 1988) address the question of optimal relationship scope more directly. These theories imply that broad relationship scope can serve as a safeguard against holdup when suppliers make transactionspecific investments (Bakos & Brynjolffson 1993;Ahmadjian & Oxley 2006;Aral, Bakos & Brynjolffson 2018). ...
... Organizational economics is the basis for these contributions. For example, buyer-supplier cooperation is thought to be enhanced when each party holds a "hostage" that is of greater value to the owner than the holder of the hostage (Williamson 1983). The threat by each to devalue the hostage it holds can be sufficient to ensure cooperation by the partner. ...
... According to a first approach, broad relationship scope creates a more effective mechanism to punish defection in repeated buyer-supplier interactions. This "punishment-enhancing" view of scope is implicit in Williamson's (1983) hostage model and is explicitly modeled in game theoretic terms by Bernheim and Whinston (1990) (mentioned above). 6 In their model, when two firms (e.g., a buyer and a supplier) enter multiple transactions with each other, they both stand to lose more if the relationship ends, relative to the case in which they are involved in few transactions. ...
... According to Williamson (1983) opportunistic behavior is a typical source of relational risk. Shirking, distorting information, stealing the partner's skills, clients and personnel are the examples of the opportunistic behavior (Das and Teng, 1998). ...
... According to Williamson (1983) opportunistic behavior is a typical source of relational risk. Shirking, distorting information, stealing the partner's skills, clients and personnel are the examples of the opportunistic behavior (Das and Teng, 1998). ...
Conference Paper
Full-text available
Although the global financial crisis that emerged in September 2008 has caused a dramatic fall in business activities of Finnish companies in Russia, the Russian market is still remaining attractive, and building successful relationships with the local reliable partners became an increasingly important strategy for many of Finnish construction companies operating in Russia. Having relationships with Russian partners under the current conditions of uncertainty of the Russian market environment, foreign companies are involuntarily exposed to certain risks. These risks can never be entirely eliminated, but to a large extent as the literature suggests trust plays an important role in counterbalancing them. The research aims at a deeper understanding of the role of trust as a counterweight to risks perceived in the project-based relationship development between Finnish and Russian construction companies networking in Russia. It offers a conceptual model and propositions on the nexus between trust and risk and its effect on the inter-organisational relationship development.
... According to Williamson (1983) opportunistic behavior is a typical source of relational risk. Shirking, distorting information, stealing the partner's skills, clients and personnel are the examples of the opportunistic behavior (Das and Teng, 1998). ...
Conference Paper
Full-text available
Although the global financial crisis emerged in September 2008 has caused a dramatic fall in business activities of Finnish companies in Russia, the Russian market is still remaining attractive and building successful relationships with the local reliable partners became an increasingly important strategy for many of Finnish construction companies operating in Russia. Having relationships with Russian partners under the current conditions of uncertainty of Russian market environment, foreign companies are involuntarily exposed to certain risks. These risks can never be entirely eliminated, but to a large extent as literature suggests trust plays an important role in counterbalancing them. The research aims at deeper understanding the role of trust as a counterweight to risks perceived in different stages of inter-organisational relationships development between Finnish and Russian construction companies. This paper offers a conceptual model and propositions on the nexus between trust and risk and its affect on the inter-organisational relationship development. In the concluding part of the paper the tentative results of the empirical part of the study are introduced.
... Rotter (1967) referred to trust as a "generalized expectancy held by an individual that the word of another can be relied upon". Researchers as Williamson (1983), Erramilli andRao (1993), Heide (1994), Heidi and John (1992) and Powell (1990) added to the foundational work by discussing about transaction-specific asset as commitment in supplier-buyer relationship, referring to physical or human assets and leading to selfenforcement from these credible commitments. Heidi and John (1992) argued that supplierbuyer relationship-specific asset created an incentive to exercise control; however, the norms discouraged organisations from taking undue advantage of partner's commitment. ...
Article
Purpose Trust and commitment (T&C) among the supply chain partners in the context of supply chain management (SCM) are of interest for both researchers and practitioners. This paper analyses literature on T&C and identifies gaps for further research. Design/methodology/approach The current literature review paper provides a comprehensive perspective on the topic using bibliometric analysis followed by a systematic review of literature. In all, 207 relevant articles were extracted from the Scopus database using the relevant key word searches. For the purpose of the systematic review, another 48 relevant papers were identified through an iterative process. Hence, 255 papers published between the years 1990–2019 were analysed for the sake of this study. Findings A total of 15 definitions of trust, nine definitions of commitment, 13 classifications of trust, 40 antecedents of trust, six classifications of commitments, 39 consequences of trust, 11 antecedents of commitment and 15 consequences of commitment were identified and analysed. Future research directions were presented. Research limitations/implications The study is limited to identifying the antecedents and consequences of T&C. A detailed framework could be developed in future research. The antecedent and consequences for T&C could be discussed in greater detail. Practical implications Important implications for managers emerge from this study for building and implementing T&C, as SCM requires a thorough understanding of relationship-building skills. The discussion on the definitions of T&C, types of trust and the antecedents and consequences provides important insights for practitioners for strategy formulation. Results provide important insights and bring about greater clarity for researchers and practitioners on T&C in SCM. Originality/value Through rigorous analysis of the prevailing research, this paper extensively reviews literature on T&C in SCM till 2019. It summarises the current status and proposes future research directions.
... One can also minimize the probability of goal conflict, holdup, and spillover through careful design of the size, scope and vertical configuration of the agreement. The probability of holdups can be reduced if partners set up parallel structures that make exposure symmetrical (Williamson, 1983;Anderson & Jap, 2005), and if they invest in cospecialized assets whose value depends on the continuation of the agreement (Teece, 1986(Teece, , 1992Dyer, 1997). Selecting partners who are not actual or potential competitors reduces the likelihood of damaging spillovers (Jones & Shill, 1991;Gomes-Casseres, 2015), and so is the merging of the potentially competing activities of partners into a commonly-held entity. ...
Article
Full-text available
As a counterpoint to Prashantham and Birkinshaw, I present an alternative model of MNE–SME cooperation where either type of firms can take the role of content provider or distributor. I argue that MNEs will interact with SMEs when there are differences in optimal scale between the content creation and distribution stages of the value chain, and it is not feasible or efficient for either party to vertically integrate between these two stages. I then build two 2 × 2 bundling models, one in which the SME provides content and the MNE distributes it, and another with the reverse configuration. In these 2 × 2s the axes are the transactional properties of the two complementary inputs, content and distribution, that MNEs and SMEs bundle to create value. I show that these models can explain the forms taken by MNE–SME cooperation and their dynamics.
Article
Full-text available
Previous research has not explained the use of real option clause in franchise contracting. The real option clause has two economic functions: To reduce transaction costs by mitigating opportunism risk and to increase strategic rents by exploiting the profit potential from future upside opportunities under uncertainty. We argue that franchisors will more likely use a real option clause (ROC) in franchise contracts under high behavioral uncertainty, high franchisors’ transaction-specific investments relative to franchisees’ and long contract duration. In addition, by combining transaction cost theory and real option theory, our study provides a new explanation for the impact of environmental uncertainty on the use of ROC in franchise networks by showing that there exists a U-shaped relationship between environmental uncertainty and the franchisor’s use of ROC. Overall, the data from German and Swiss franchise systems provide support of the research model.
Article
Economic insights are powerful for understanding the challenge of managing a highly infectious disease, such as COVID-19, through behavioral precautions including social distancing. One problem is a form of moral hazard, which arises when some individuals face less personal risk of harm or bear greater personal costs of taking precautions. Without legal intervention, some individuals will see socially risky behaviors as personally less costly than socially beneficial behaviors, a balance that makes those beneficial behaviors unsustainable. For insights, we review health insurance moral hazard, agricultural infectious disease policy, and deterrence theory, but find that classic enforcement strategies of punishing noncompliant people are stymied. One mechanism is for policymakers to indemnify individuals for losses associated with taking those socially desirable behaviors to reduce the spread. We develop a coherent approach for doing so, based on conditional cash payments and precommitments by citizens, which may also be reinforced by social norms.