Inter-Organizational Trust as a Shift Parameter in the Extended Transaction Cost Framework: A First Application to the LNG Industry

Abstract

This paper provides an empirical analysis examining the effect of both transaction characteristics and the institutional environment on governance choice. Using a dataset of 237 corporate-specific value chains in the global LNG industry, we introduce inter-organizational trust as a shift parameter. Following transaction cost economics, it is hypothesized that specific investments under uncertainty provide incentives to integrate vertically. Second, it is argued that inter-organizational trust changes the relative costs of vertical integration and non-integration and supports less hierarchical organizational structures. These economic relationships are tested based on probit and ordered probit models. Estimation results provide broad support for both propositions