Trust, Control, and the Economics of Governance  book cover
1st Edition

Trust, Control, and the Economics of Governance

ISBN 9780367250904
Published June 17, 2019 by Routledge
212 Pages

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Book Description

In today’s world, we cooperate across legal and cultural systems in order to create value. However, this increases volatility, uncertainty, complexity, and ambiguity as challenges for societies, politics, and business. This has made governance a scarce resource. It thus is inevitable that we understand the means of governance available to us and are able to economize on them. Trends like the increasing role of product labels and a certification industry as well as political movements towards nationalism and conservatism may be seen as reaction to disappointments from excessive cooperation. To avoid failures of cooperation, governance is important – control through e.g. contracts is limited and in governance economics trust is widely advertised without much guidance on its preconditions or limits.

This book draws on the rich insight from research on trust and control, and accommodates the key results for governance considerations in an institutional economics framework. It provides a view on the limits of cooperation from the required degree of governance, which can be achieved through extrinsic motivation or building on intrinsic motivation. Trust Control Economics thus inform a more realistic expectation about the net value added from cooperation by providing a balanced view including the cost of governance. It then becomes clear how complex cooperation is about ‘governance accretion’ where limited trustworthiness is substituted by control and these control instances need to be governed in turn.

Trust, Control, and the Economics of Governance is a highly necessary development of institutional economics to reflect progress made in trust research and is a relevant addition for practitioners to better understand the role of trust in the governance of contemporary cooperation-structures. It will be of interest to researchers, academics, and students in the fields of economics and business management, institutional economics, and business ethics.

Note that this work is the first of its kind that explicitly reflects on the societal realities, how these drive the assumption setting process, and how these assumptions influence the theory outcome.

Table of Contents

1. Introduction

1.1. The Problem of Governing Cooperation

1.2. The Need for a Framework to Economize on Governance Devices

1.3. Structure of the Book

2. Understanding of Trustworthiness as an Intrinsic Institution

2.1. Trust: Expected Trustworthy Behavior

2.1.1. Encapsulated Interest as the Rational Choice Account of Trust

2.1.2. The Leap of Faith Account and Trust Propensity

2.1.3. Transaction Cost Economics and the Rationality of Trust

2.1.4. Agency Theory, Asymmetric Agency and Entrusting

2.2. Control: Non-Opportunism and Other Institutions

2.2.1. Non-Opportunism as a Feature of Trustworthiness

2.2.2. Non-Opportunism as an Intrinsic Institution 34

2.2.3. Opportunism and Empirical Conditions of ‘Conventional’ Institutions

2.3. On the Interplay of Trust and Control

2.3.1. Substitutes vs. Complements

2.3.2. Negative Indirect Effects: Crowding Out

2.3.3. Positive Indirect Effects: Crowding In

2.3.4. Framing determining Sign of Indirect Effect

3. The Proposed Heuristic

3.1. ‘Trust Control Economics’ as a Theoretical Framework

3.1.1. Theoretical Underpinnings and Choice of Host Discipline

3.1.2. Revisiting the Assumption Set

3.1.3. Trust Control Economics

3.1.4. On the Distinction between Extrinsic and Intrinsic Governance

3.2. The ‘Extended Trust Sentence’ as Pattern of Trust Relations

3.2.1. Recognizing the Empirical Conditions of the Trustee

3.2.2. Recognizing Control as an Element of Circumstances: ‘Trustworthiness Accretion’

3.2.3. Social Capital, Enforcement Capital, and Trustees Trading in Freedom

3.2.4. The Negative Extended Trust Sentence

3.3. The ‘Game of Trust and Control’ as Application in Practice

3.3.1. Introduction

3.3.2. Building the Game

3.3.3. Possible Formalization of Non-Opportunism

3.3.4. On the Notion of Control

4. Use-Test of the Game of Trust and Control

4.1. Calibration of the Non-Opportunism Parameter in Practice

4.2. Information Intermediaries

4.2.1. General Aspects

4.2.2. Information Intermediaries within the Primary Game

4.2.3. On Sources for Indirect Signals/Cues

4.2.4. On the Information Intermediary as Executing Trustee

4.2.5. Limits to Information Intermediaries

4.3. Control Facilitator

4.3.1. General Aspects

4.3.2. Chain of Governance

4.3.3. (Sub-)Delegation and Remoteness

4.3.4. Limits of Control in Practice

4.3.5. Self-Commitment

4.4. Risk Bearer

4.4.1. General Aspects

4.4.2. On Sub-Delegation and Ultimate Liability

4.4.3. Limits to Risk Bearers

4.4.4. On the Inherent Tension of Trust Industries

5. Conceptual Evaluation of the Heuristic

5.1. Framework for Evaluation

5.2. Rigor vs. Relevance: Linking Theory and Problem

5.3. Abstraction vs. Re-Enrichment: Linking Theory and User

5.3.1. On the Heuristic Priming and Framing Trust Decisions

5.3.2. On the Heuristic Tapping Prior Knowledge

5.4. (Re-)Cognition: Linking User and Problem

5.4.1. On the Heuristic Addressing and Accommodating a Relevant Problem

5.4.2. On the Reasoning Resource Requirements of the Heuristic

6. Concluding Remarks

6.1. Results for Practical Implementation

6.1.1. Additions to the understanding of trust-control-problems

6.1.2. Additions to the decision making toolbox

6.2. Results Regarding the Conceptual Understanding

6.2.1. From the perspective of trust research

6.2.2. From the perspective of economics  

Publication bibliography

Appendix: Game Theoretic Contributions to Formalizing Trust Problems


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Philipp Herold earned his PhD in economics from the Leipzig Graduate School of Management, Germany with the support of the Dr. Werner Jackstädt Foundation. He is a corporate finance professional in the insurance industry.