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Introduction
Agency theory and transaction cost economics (TCE) assume that people are opportunistic in seeking self-interest (Beccerra and Gupta, 1999). Behavioral scientists view trust as a key ingredient of social capital. Reputation and trustworthiness can become a source of competitive advantage (Barney and Hensen, 1995). Hence, institutions may reduce transaction costs by creating trust, specifically the costs of cooperation and specialization (Hill, 1995). However, the institutional environment in the emergent market including China is less stable (Scott, 2001) and less conducive to mutually beneficial economic exchange between economic actors (North, 1994), so transaction costs are generally higher (Khanna and Rivkin, 2001; Peng, 2003). In addition, a poorly specified property rights undermines trust among transacting partners, and high transaction costs lead to firm inefficiency (Fussell, et al. 2006). Therefore, the competing hypothesis is that institutional conditions in emerging economies do not yet support lower-cost transactions.
Some level of trust is necessary for individuals and society to function adequately and effectively. What is the role of trust in curbing opportunistic behaviors? What is the economic payoff in maintaining trust and high credit rating? There is no consistent evidence that formal monitoring mechanisms and relational trust complement or substitute for each other (Poppo and Zenger, 2002). This study examines the role of trustworthiness in reducing transaction costs and improving firm performance. The impact of information flow, environmental uncertainty, and trust on firm transaction costs and profit were investigated. In particular, the present study integrates the transaction cost question with the institutional perspective and argues that firm performance depends on the entrepreneur's propensity to trust and on the credit rating of the firm. The results help to advance our understanding of these relationships among social context variables, trust, and firm performance. In addition, it aims to test whether or not the relationship between trust and performance outcomes is robust in the emergent institutional environment.
The assumption of current economic exchange is based on individualistic behavior of exchange partners seeking self-interest and maximum profit. Social and economic factors exert significant influence on transactions in different cultural settings. Social pressure, the moral obligations inherent in the social norms, may also constrain opportunistic behavior in a more collectivistic and relationship-oriented society like China's (Lui and Ngo, 2004). The China context is critical...