Professor Paul Pavlou in a forthcoming study challenges the prevalent assumption that trust and risk are always influential on transaction decisions, and that there is always a need to build trust and reduce risk irrespective of context. The study specifies the boundaries of trust and risk on transaction activity in the context of the two largest online marketplaces, Amazon and eBay.
The study shows that the effects of trust and risk are actually only important in a rather narrow window where the institutional structures are moderately effective, while the effects of trust and risk are insignificant for both very effective or very ineffective institutional structures. This quadratic (“Inverted-U”) pattern suggests that the literature may have over-emphasized the role of trust and risk and ignored the role of the marketplace’s institutional context.
From a practical sense, by ignoring the trade-off in the design of institutional structures to optimize the effects of trust and risk, the results suggest that online marketplaces may have over-invested in institutional structures to build trust and reduce risk.
By specifying the boundaries of trust and risk, this study aims at sensitizing managers about the trade-offs in the design of institutional structures in online marketplaces.
The article (co-authored with David Gefen) titled “The Boundaries of Trust and Risk: The Quadratic Moderating Role of Institutional Structures” has been accepted for publication in Information Systems Research (ISR).