The Effect of Real Options on Trust and Trustworthiness: The Relevance of Irrelevant Alternatives
23 Pages Posted: 6 Jun 2005
Date Written: February 2005
The study examines the effect of outside options on trust and trustworthiness. Building on the logic of self-justification and escalation, it is hypothesized that parties who have invested in outside options will behave in a less trustworthy (and more self-serving) manner with their exchange partners than will those who have not invested - even when the outside options are inferior and thus irrelevant. Thus, the existence of sunk costs, and not the mere presence of outside options, might lead to non-reciprocity by trusted parties. It is further hypothesized that trustors will not be sensitive to these effects of real options on trusted parties, and will not adjust their level of trust appropriately, leaving themselves vulnerable to exploitation. The hypotheses are tested and confirmed in an experiment using modified versions of the Trust Game (cf., Berg, Dikhaut, & McCabe, 1995). Strategic and theoretical implications are discussed.
Keywords: Trust, Real Options, Trustworthiness
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