Transaction Costs and Reputation-Based Trust in Biotech Alliances

Abstract

Reputation-based trust, reflecting the time-dependency of trust, influences inter-firm alliances. A literature review resulted in hypotheses which were tested in an empirical study based on a quantitative analysis and in-depth interviews with firms in the bio tech sector of human health in the Netherlands. In high dynamic markets firms use reputation-based trust as an informal coordination mechanism for alliances. However, it does not reduce the necessity of contracts. Reputation results in a decline of overall transaction costs of alliances. Reputation-based trust reduces the uncertainty between alliance partners and the frequency of interaction. It does not result in an increase of asset specific investments.