Adaptive Governance: The Role of Loyalty

Abstract

This paper is concerned with the governance of vertical interfirm relations, i. e. relations between buyers and their suppliers on industrial, intermediate-goods markets. Networks of interacting, adaptive buyers and suppliers are viewed as complex adaptive systems (Holland and Miller, 1991), which leads to the use of computer simulations to explore the strategies that boundedly rational, adaptive agents learn to use to manage their relations with suppliers. Starting from a static transaction cost economic perspective, the model is extended with allowance for loyal behavior and for trust to build up, with network embeddedness of relations and with the possibility for the agents to adapt their governance to changing circumstances and to the changing relation, rendering economic organization path-dependent. The paper analyzes how relations develop in time: actors making and breaking relations, on the basis of evaluations of expected profitability and loyalty. When allowance is made for adaptation of the relative weights attached to each of these criteria, the result is that buyers adaptively shift the weight from profitability to loyalty.