Performance of Trust-Based Governance

Trust is crucial for the success of interorganizational relationships, yet we lack a clear understanding of when trust-based governance is likely to succeed or fail. This paper explores that topic by way of a formal model and simulations based on the well-known trust game. We say that trust-based governance performs well if it results in a willingness to be vulnerable with trustworthy others \emph{and} an unwillingness to be vulnerable with untrustworthy others. Our main finding is that trust-based governance performs better under high relevance of trustworthiness (i.e., when trustworthiness matters a lot for outcomes), and under low relevance of perceived trustworthiness (i.e., when perceived trustworthiness matters little for the willingness to be vulnerable).