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 via a closed-form and a computational analysis of a formal model
based on the well-known trust game. We say that trust-based governance performs
better in situations where it results in a willingness to be vulnerable with trustworthy
others and an unwillingness to be vulnerable with untrustworthy others. We find that
trust-based governance performs better in situations in which (a) trustworthy and
untrustworthy partners exhibit markedly different behavior (high behavioral risk) or
(b) the organization is willing to be vulnerable despite doubts concerning the partner’s
trustworthiness (low trust threshold)
