Adaptive Governance: The Role of Loyalty

Abstract

This paper is concerned with the governance of vertical interfirm relations, i.e. relations between buyers and their suppliers on industrial, intermediate-goods markets. Networks of interacting, adaptive buyers and suppliers are viewed as complex adaptive systems (Holland and Miller 1991), which we study using computer simulations. Starting from a static transaction cost economic perspective, our model is extended with allowance for loyal behavior and for trust to build up and with temporal and network embeddedness of relations. The paper analyzes how relations develop in time: actors making and breaking relations, on the basis of evaluations of expected profitability and loyalty. When allowance is made for adaptation of the relative weights attached to each of these criteria, the result is that buyers adaptively shift the weight from profitability to loyalty. This is an especially interesting and strong result, because the fitness-measure on which adaptation is based is profit only. ..