The Value of Trust and Fairness in Alliances: An Economic Perspective

Kiridaran Kanagaretnam,Alex Thevaranjan

doi:10.4236/tel.2021.112012

Abstract

In this paper, we develop an analytical model to illustrate the role of trust and fairness in alliances and quantify their economic value to alliance partners. We show that alliance profits and the individual firms’ profits are greatest when partners trust and deal fairly with each other. Moreover, trusting and fair dealing partners benefit the most from the synergies of joint production. We also show that when partners do not trust each other, the alliance profits are reduced by a large amount. The alliance potential is further destroyed if partners do not deal fairly with each other in addition to not trusting each other. The lack of trust and fair play causes firms to fight for control. The fight may result in conflict between the two partners or the emergence of a dominant partner. In the dominant partner case, we show that only alliances with high levels of synergy will be formed. But even then, the dominant partner will realize only a small portion of the benefits from synergy.

Highlights

Synergies between firms can be exploited by the formation of alliances (Parkhe, 1998)
We develop an analytical model to illustrate the role of trust and fairness in alliances and quantify their economic value to alliance partners
We show that alliance profits and the individual firms’ profits are greatest when partners trust and deal fairly with each other

Summary

Introduction

Synergies between firms can be exploited by the formation of alliances (Parkhe, 1998). In this paper, we develop an analytical model to illustrate the role of trust and fairness in alliances and derive their economic value to alliance partners. We develop a simple analytical model to address the following three research questions: 1) What is the alliance potential when partners deal fairly and trust each other?. If the two alliance firms trust each other and agree to share profits they will form an alliance irrespective of their level of synergy. The absence of trust and the threat of opportunism reduce the level of effort put forward by partners This reduction in alliance potential prevents some firms from coming together in an alliance, especially when synergies from joint production are low.

The Model

Implications of Trust and Fairness in Alliances

Findings

Conclusion