TITLE:
The Value of Trust and Fairness in Alliances: An Economic Perspective
AUTHORS:
Kiridaran Kanagaretnam, Alex Thevaranjan
KEYWORDS:
Business Alliances, Trust, Fairness, Mathematical Modelling, Synergy
JOURNAL NAME:
Theoretical Economics Letters,
Vol.11 No.2,
March
30,
2021
ABSTRACT: In this paper, we develop an analytical model to
illustrate the role of trust and fairness in alliances and quantify their
economic value to alliance partners. We show that alliance profits and the
individual firms’ profits are greatest when partners trust and deal fairly with
each other. Moreover, trusting and fair dealing partners benefit the most from
the synergies of joint production. We also show that when partners do not trust
each other, the alliance profits are reduced by a large amount. The alliance
potential is further destroyed if partners do not deal fairly with each other
in addition to not trusting each other. The
lack of trust and fair play causes firms to fight for control. The fight
may result in conflict between the two partners or the emergence of a dominant
partner. In the dominant partner case, we show that only alliances with high levels of synergy will be formed. But even
then, the dominant partner will realize only a small portion of the
benefits from synergy.