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Building Trust in an Environment with Separation of Ownership and Control
Jeffrey Hales, University of Texas at Austin
Michael G. Williamson, University of Texas at Austin
ABSTRACT. We extend prior research by investigating the conditions under which implicit contracts can be effective in motivating employee productivity when owners’ agents, rather than the owners themselves, are the persons with sole responsibility for determining employee rewards. Our aim is to understand what firms can do to facilitate trust in (and reciprocity from) an agent whose earnings rise and fall with the owner’s. Directly testing trust in this setting is important because theory suggests that the findings from prior research on bilateral trust relationships will not necessarily generalize to this important environment. Whereas repeated-interaction and reducing the cost of reciprocity have previously been shown to independently enhance trust, we provide theory and evidence that both are necessary for agents to effectively administer implicit contracts. Our findings show that subtle changes in explicit reward systems can dramatically effect the efficacy of unaltared implicit contracts.
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