The moderating role of trust in contractual choice

Abstract

PurposeThe aim of this research is to determine how trust might moderate the effect of asset specificity on the contractual choice.Design/methodology/approachThe sample is drawn from the qualified appellation of origin (DOCa) Rioja wine market. A binomial logit was used as the primary technique for investigation of the hypothesis for the final sample size of 68 observations (34 oral contracts and 34 written contracts).FindingsThe evidence presented in this paper points to the fact that asset specificity, the most important characteristic in transaction cost economics, will not be a strong predictor of the level of contract formalisation for transactions that enjoy a high level of trust.Research limitations/implicationsThis study has important limitations that imply caution in generalising the findings. First, the agrarian legal framework is likely to alter the effectiveness of formal contracts as governance devices. Another limitation of this analysis is that it is not a dynamic analysis and, hence, it does not consider the possibility of trust emerging over time.Practical implicationsIt is suggested that the possession of trust between contractual parties allows them to reduce transaction costs without resorting to a high level of contractual formalisation.Originality/valueThis paper is useful for practitioners and academics in the field of contractual choice. The research provides some initial insight into the moderating influence of trust on the relationship between asset specificity and level of contractual incompleteness in the viticulture sector.