Authors: Kiridaran Kanagaretnam, Alex Thevaranjan
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.
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