To Trust or Not to Trust? What Matters in Local Government-Vendor Relationships?

Relational contracting or collaborative governance has come to the forefront of scholarly studies of government privatization efforts. The concept of trust (between contracting governments and their vendors) is rising in importance as one of the central tenets of this type of governance. What is largely understudied in the midst of this increasing attention to the topic is identifying how and under what conditions trust is formed and sustained. Borrowing from economic, organizational, sociological, and management theories, we develop competing hypotheses to examine what determines the extent of trust contracting governments display toward their service providers. Our findings suggest that local governments tend to place more confidence in their vendors' faithfulness and honesty when their contracting partners are from the same sector (i.e., other governmental units), had known reputations prior to the relationship, have strong community ties, and perform their tasks well. Interestingly, several economic theory-based explanations-rational choice and game theory, social exchange theory, and transaction cost economics-find only limited support.