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Agency and trust mechanisms in consumer satisfaction and loyalty judgments

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Abstract The authors propose a framework for understanding key mechanisms that shape satisfaction in individual encounters, and loyalty across ongoing exchanges. In particular, the framework draws together two distinct approaches:(1) agency theory,
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  JOURNAL OF THE ACADEMY OF MARKETING SCIENCE WINTER 2000Singh, Sirdeshmukh / CONSUMER LOYALTY Agency and Trust Mechanismsin Consumer Satisfactionand Loyalty Judgments Jagdip SinghDeepak Sirdeshmukh Case Western Reserve UniversityThe authors propose a framework for understanding keymechanisms that shape satisfaction in individual encoun-ters, and loyalty across ongoing exchanges. In particular,theframeworkdrawstogethertwodistinctapproaches:(1)agency theory, rooted in the economic approach, that views relational exchanges as encounters between princi- pals (consumers) and agents (service providers) and (2)trust research that adopts a psychological approach to-ward consumer-provider relationships. In so doing, theauthorsspecifyhowtrustmechanismscooperateandcom- petewithagencymechanismstoaffectsatisfactioninindi-vidual encounters and influence loyalty in the long run. Because a multidimensional conceptualization of trust isused, the hypothesized framework offers a fine-grained understanding of the interrelated mechanisms. The highlevel of specificity allows extraction of multiple proposi-tions, facilitates empirical testing, and encourages theo-retical development of the proposed model. Severaldirections to guide future research are provided. Consumer loyalty is emerging as the marketplace cur-rency for the twenty-first century. Marketers desire andseek it through building relationships with customers, yetit remains elusive. To acquire and hold this elusive cur-rency would require a deep understanding of processes bywhich consumers maintain relational exchanges with pro-viders, and how these processes in turn influence loyalty.This is especially the case for services as their inherentintangibility, heterogeneity, and performance ambiguitypose challenges for forming and sustaining customer-service provider relationships. Although this issue hasreceived significant attention in the literature, some criti-cal gaps remain.First, the literature has tended to view consumer rela-tionshipsfromtheperspectiveofthemarketer/servicepro-vider. Few researchers have used the consumers’perspec-tive to examine relational exchanges. Likewise, muchtheoreticalworkforunderstandingrelationalexchangesinservicecontextshasbeenshapedbyconceptualizationsof exchange mechanisms involving interorganizational part-ners(e.g.,industrial/channel)(Berry1995;Crosby,Evans,and Cowles 1990; Gronroos 1994; Morgan and Hunt1994;ShethandParvatiyar1995).Bycontrast,theoreticalwork for probing relational mechanisms from a con-sumer’s perspective is lacking. Thus, Buttle (1996)observes that the “voice of the customer is absent frommuch relationship marketing.” Because relationships areinherently two-sided, this lopsided focus is problematic.Second, the limited research that exists has tended tofocus largely on either the economic or psychologicalapproach; as such, integrative attempts have been lacking.For instance, researchers have had some success in usingthe economic principles of agency theory to understandcontracts between consumers (principals) and providers(agents) (Bergen, Dutta, and Walker 1992; Casson 1997).Likewise, psychological approaches have tended to focuson the role of consumer-provider trust in promoting rela-tional exchanges and building loyalty (Garbarino andJohnson 1999; Morgan and Hunt 1994). Although bothapproaches have provided interesting insights, little atten-tion has been directed at how the economic and psycho-logicalapproachesmightworktogethertoshapeandinflu-ence consumer loyalty in relational exchanges. Are trust Journal of the Academy of Marketing Science.Volume 28, No. 1, pages 150-167.Copyright © 2000 by Academy of Marketing Science.  and agency contracts alternative and independent mecha-nisms for shaping customer loyalty? Or do they competefor influence? Or, more interestingly, can these mecha-nisms work together in building long-lasting customer-provider bonds? Questions such as these can be pursuedonly by a theoretically driven effort that brings togetherthese diverse approaches.This article aims to take an initial step toward an inte-grativetheoreticalframeworkforunderstandingconsumerloyalty in relational exchanges. We develop a framework that is grounded in strong theory, uses core constructs thatappearcentraltoagencyandtrustliterature,andprovidesafine-grained understanding of consumer processes. Con-sistent with this, the proposed model has three distinctcharacteristics.First,wedrawonacriticalanalysisofagencytheorytodevelop a conceptual model of relational processes thatexplicitly considers the role of trust in consumer-providerexchanges. Agency theory offers a solid foundationbecause it construes relationships in terms of principal-agentproblemsofadverseselectionandmoralhazard,anduses assumptions that are compatible with the nature of most service exchanges. Moreover, the proposed frame-workfocusesontheconstructofconsumertrust.Althoughthis focus was motivated by psychological approachesfor understanding relational exchanges, we go beyondprevious research in conceptualizing the role of trustmechanisms.Second, we build on recent research to hypothesize thesimultaneous influence of agency and trust mechanismson encounter-specific satisfaction and long-term loyalty.As such, the proposed model is able to hypothesize condi-tionsthatallowtrustandagencymechanismstocooperate(or compete) for influence over multiple encounters inrelational exchanges. In so doing, we consider how eachexchange encounter is shaped by, and in turn shapes, rela-tional characteristics such as trust and loyalty. Thisdynamic consideration has been largely ignored in pastresearch.Finally, to obtain a fine-grained understanding of rela-tional processes, we use a multidimensional conceptuali-zation of consumer trust. That is, we hypothesize a dispa-rate pattern of differential effects for the competence andbenevolence dimensions of trust. Much research in mar-keting views trust as a unidimensional construct. Global,unidimensional conceptualizations are likely to obfuscatesubstantive insights when the underlying construct has awidebandwidthandtheoreticalconsiderationsfavoradif -ferential pattern of effects. Taken together, these charac-teristics hold the potential to provide new insights intorelationalexchangesinvolvingconsumersandservicepro-viders, and address important questions in marketing. Webegin with a discussion of agency mechanisms in con-sumer exchanges. AGENCY MECHANISMSAND CONSUMER EXCHANGES According to agency theory, information asymmetryand opportunism are two key factors that present dilem-mas for consummation of service exchanges. The notionof information asymmetry implies that one partner in theexchange has greater quantity and/or quality of informa-tion.Both,ofcourse,haveincompleteinformationandaremaking decisions under uncertainty. The informationdomain is usually circumscribed by the nature and qualityof service delivered. In most instances, the informationasymmetryisinfavoroftheserviceprovider.Takethecaseofarestaurant.Therestaurantowner/cookhasinformationaboutthefreshnessandqualityoffoodpreparationsthatisnot easily available to ordering customers. Customers, of course, try to infer this information when they experiencethe food preparation. However, this inference has twoproblems:(a)atbest,itapproximatestheinformationpos-sessed by the service provider and, at worst, may be unre-lated to it; and (b) it occurs after the purchase is made sothat, at the time of purchase, a decision has to be madewithoutaccesstopriorknowledge. 1 Becauseofitsintangi-bility, information asymmetry is a common characteristicof service consumption. It follows that, in the absence of any other mechanisms for overcoming information asym-metry, consumers are likely to find it difficult to distin-guish between restaurants with different quality-of-foodpreparations. This presents the dilemma of adverseselection.The problem of adverse selection occurs when princi-pals are unable to discriminate between different qualityagents (Mudambi 1997; Wilson 1980). As a buyer, theconsumer is the principal in a market-mediated exchange,while the service provider occupies the role of an agent.It is implicit that there is heterogeneity in the qualityand configuration of services offered by differentagents—some provide high quality, while others are low-qualityproviders.However,thisheterogeneityisnottrans-parent to the principal because of informational deficien-cies.Assuch,theprincipalislikelytofinditdifficulttotella high-quality provider from a low-quality supplier.Moreover, recognizing the principal’s informational defi-ciency,alow-qualityprovidermaybetemptedtofoolbuy-ers into believing that he or she is a high-quality providerandextractunjustifiedprofits.Thisfurthercompoundstheadverse selection problem.Opportunism follows from the notion that partners inthe exchange are motivated by self-interest and are likelyto exploit the situation, if they can, to further their self-interest. As such, this assumption is less about the objectof exchange (e.g., service offered and consumed) andmore about the character of partners involved in theexchange. Indeed, if information was symmetrically dis-tributed, market mechanisms would keep opportunism in Singh, Sirdeshmukh / CONSUMER LOYALTY 151  check. In the presence of asymmetrical information, theprobabilityofopportunisticbehaviorincreases.Inthecaseof the restaurant example, if the owner/cook is aware thattheconsumerisunabletojudgefoodquality,heorshemaybetemptedtoreducethequalityofingredients(e.g.,buyinbulk weekly rather than fresh every day) to obtain higherreturns. Of course, consumers may suspect that a serviceprovider is behaving opportunistically but, depending onthe degree of information asymmetry, may be unable todetect it. Without detection, consumers may be lessinclined to terminate the exchange and inadvertently endup rewarding the service provider’s opportunistic moves.This results in the dilemma of moral hazard.Oncetheprincipalhiresanagent,theproblemofmoralhazard comes into play and involves the dilemma that theselected provider may not consistently deliver service atthe promised quality level. An opportunistic agent maydecide to skimp on quality to reap greater payoffs anddeliver a level of quality that is lower than promised in theinitial contract with the principal (in an objective sense).Information asymmetry may further bolster the confi-denceofopportunisticagentswhobelievethatqualitydec-rements would escape detection by informationally defi-cient principals. Note, however, that moral hazard andadverse selection are independent problems in agencyrelationships. That is, even if the principal is able to over-come the problem of adverse selection, he or she isexposed to the problem of moral hazard. In the worst sce-nario, both problems could co-occur.Inthefaceoftheseproblems,howdoserviceexchangessucceed in the market? Just as agency theory formalizesthe problems in market contracts, it offers workable solu-tions that help exchange partners mitigate these inherentproblems. Essentially the agency theory solution toadverse selection is signaling. In this situation, it is in theself-interest of a high-quality service provider to revealprivateinformationabouthisorheroperationstotheprin-cipalinawaythatcannotbeimitatedbyalow-qualitypro-vider. Typically, this is operationalized as investments innonsalvageable assets that satisfy three criteria: (a) theyshould be clearly visible, (b) unambiguously signal highquality, and (c) be perceived by principals as “hos-tages”—investmentsthatarecommittedandcannotbesal-vaged. In the case of the restaurant provider interested inhigh quality, agency theory prescribes that he or she solvethe information asymmetry problem by, say, constructingan attractive building with a very impressive facade andenvirons. Investments in such fixed assets are sunk buthighlyvisible. 2 Theyservetounequivocallysignalthattheservice provider is of high quality and willing to presenthis or her fixed investments as hostages to principals—amovethatalow-qualityproviderislessinclinedtoimitate.Because of the visibility of the hostage investments, prin-cipals can now discriminate among service providers andovercome the adverse selection problem.What about moral hazard? Agency theory’s solution tomoral hazard is risk sharing (Holmstrom 1980). In theclassiccase,theprincipalbearsaportionoftherisktoalle-viate the problem of opportunism. In the context of consumer-service provider exchanges, price mechanismsmay serve as a risk-sharing device. That is, consumerswho are interested in high quality may be willing to pay aprice premium as a way of mitigating provider opportun-ism. The logic is as follows. As principals, consumers aremotivated by self-interest as well and likely to withdrawthe price premium if they suspect opportunism. Burdenedwith significant sunk investments, the provider reliesheavily on a continuous stream of returns to amortize thehostage investments in the long term. Thus, while short-term opportunism may be expedient, the agent risks per-manent loss of price premiums as principals wise up.Given the nature and extent of these investments, thedownsideriskistantamounttobankruptcy.Thisdownsiderisk, combined with principal risk sharing, is posited tokeep the agent’s opportunism in check, allowing orderlyconsummation of market-mediated service exchanges.There is some empirical evidence in support of agencymechanismsforconsumer-providerexchanges.Inarecentstudy involving automotive services, Mishra, Heide, andCort(1998)foundthat,withincreasinginformationasym-metry, managers were more likely to provide a strongersignal of their quality (e.g., by making nonsalvageable“bonding” investments in building, decor, and facilities;path coefficient = .76). In turn, increasing informationasymmetry enabled managers to extract increasinglyhigherpricepremiumsfromcustomers(pathcoefficient=.42), presumably as an incentive for managers to resistopportunism in delivering quality service. As such,exchangedynamicsintheautomotiveservicesarethoughttobegovernedbysignalingandincentivemechanismsthathelp solve agency problems. CRITICAL ANALYSIS OFAGENCY MECHANISMSIN CONSUMER EXCHANGES In the literature, two critical deficiencies of agencymechanisms have been identified that hold relevance forconsumer-provider exchanges. The first relates to theimplied condition of sufficiency, while the second con-cerns an omitted necessary condition. We discuss each inturn.Per agency theory, the exchange problems that occurduetoinformationasymmetryaresolvedbysignalingandrisk-sharing mechanisms. In other words, market signalsand price incentives are thought to be sufficient devices toovercome information asymmetry and favor ongoingexchanges. In the example of the restaurant, the invest-ments in building and decor are thought to be both 152 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE WINTER 2000  distinctive and compelling for consumers to sufficientlyovercome the problem of adverse selection. Likewise,marketmechanismsarethoughttoproducetheappropriateprice premiums that the consumers can offer as sufficientincentivestoensurethattheyarenotlikelytobesubjectedtomoralhazards—thatis,consumersareassuredthatpro-viders’ opportunism would be appropriately constrained.Neither condition of sufficiency of agency mechanismshas been empirically examined within a consumer-provider context.On logical grounds, there is reason to question thesesufficiency conditions. This is because neither conditiondirectly helps to reduce the information asymmetry expe-rienced by the principal. Rather, signaling and incentivemechanismsmerelyallowtheprincipaltocopewithambi-guity that he or she currently faces. As such, agencymechanisms address consequences of information asym-metry but fail to mitigate the underlying informationalimbalance that caused the agency problem in the firstplace.Withoutmechanismstoreduceinformationalasym-metry, coping devices lack the power to sustain multiple,long-term exchangesbetween consumersand servicepro-viders. Persistent informational asymmetry does notappear conducive to stable and satisfying marketexchanges. Thus, while signaling and incentives may beuseful mechanisms, they are not sufficient for our under-standing of market-mediated consumer exchanges.The second critical deficiency noted in agency mecha-nisms involves the omission of necessary condition(s) fortheconsummationofexchangesinthefaceofinformationasymmetry. Although several plausible necessary condi-tionshavebeenexplicated(e.g.,seeChilesandMcMackin1996), we focus here on the role of trust—specifically, theprincipal’s level of trust in the agent. Why should trust beconsidered in agency mechanisms? The rationale is two-fold. First, sociologists contend that agency mechanismsomit some necessary conditions by posing the question, if human behavior is motivated mainly by opportunism andself-interest (as agency theory contends), why is it thatmarket-mediated exchanges are not characterized by“force and fraud”? (Granovetter 1985:488). The reason,sociologists argue, is not that agency theory’s assumptionof opportunistic tendencies is untenable. Rather, market-mediated relational exchanges are socially embedded,and, consequently, the norms of social relationships (e.g.,reciprocity, fairness) provide a countervailing force toconstrain this inherent opportunism (Casson 1997). Inother words, the prevalent social and cultural rules for fairplay press for behaviors that are perceived by exchangepartners as trustworthy (Uzzi 1997). Thus, while theagents may like to act opportunistically, the moral conse-quences of being detected as blatantly opportunistic holdconsiderable sway on agents’ behaviors. As such, in ourrestaurant example, the owner fears that if the customersdetectthatthefreshfishonthemenuisreallynottheday’scatch, he or she may suffer irreparable loss of reputationbecause prevailing social norms regard such misrepresen-tation as morally unacceptable. By contrast, agents’behaviors that are consistent with and uphold the obliga-tionsimpliedbysocialnormsgeneratetrust.Becausecon-sumers have an aversion to relationships with someonetheydistrust,sociologistshavearguedthattrustisaneces-saryconditionforrelationalexchanges.Inthissense,trustisanomittedindependentvariableinagencymechanisms.The role of trust is also recognized in recent organiza-tional research. However, this research tends to view trustas a critical dependent variable instead. In the context of buyer-selleralliances,itisarguedthatgovernancemecha-nisms may be categorized on the basis of motivations of (1) minimizing opportunism or (2) maximizing opportu-nity (Dyer and Singh 1998; Hansen, Hoskisson, and Bar-ney 1999). Consistent with agency theory andtransaction-cost economics, opportunism minimizationmotivation calls for investments in governance mecha-nisms whose sole purpose is to curb opportunism. Whilecostly, such investments do help in preserving currentprofit streams. Recognizing that mechanisms for curbingopportunism do not necessarily promote cooperation,organizationaltheoristsnotethatopportunity-maximizingmechanismsthatfocusondevelopingtrustsimultaneouslycurb opportunism and promote cooperation (Dyer andSingh 1998; Hansen et al. 1999). In this sense, the goal of governance mechanisms is to enhance trust among part-ners with the expectation that relational exchanges persistover time to yield enhanced rents for both partners.This logic can be extended to consumer-providerexchanges by noting that, for relational exchanges thatlikelymaximizeopportunityforconsumersandproviders,agency mechanisms may not be sufficient. The develop-mentoftrustbetweenagentsandprincipalsmaybeneededtopromoterelationalexchangesandyieldbenefitsforbothpartners (Chiles and McMackin 1996; Crosby et al. 1990).Specifically, agents benefit from relational exchangesbecause these allow them to amortize the bonding invest-ments over multiple exchanges. In this sense, the agent’strust in the principal’s continued patronage and risk shar-ingviapricepremiumsisacriticalfacilitatingfactor.Like-wise, principals benefit by developing relationalexchanges that are effective and efficient in coping with,andperhapsreducing,theirinformationasymmetry.With-out some acceptable level of trust, principals may beunwilling to provide quality premiums because they dis-trust either the agent’s signal of quality or intention todeliver promised quality or both. Thus, it is in the self-interestofagentstoactinamannerthatbuildsconfidencein their reliability and integrity to ensure that currentexchanges persist over time. 3 Giventhissignificantroleoftrust,wenextexaminethetrust construct in more depth. Thereafter, using the multi-dimensionality of trust construct, we show that the role of  Singh, Sirdeshmukh / CONSUMER LOYALTY 153  trust in agency mechanisms is more complex than hereto-fore recognized. TRUST/DISTRUST MECHANISMSIN CONSUMER EXCHANGES The rich literature on organizational trust drawn fromdiverse disciplines including sociology, psychology, andeconomics has led to numerous conceptualizations of thetrust construct. Nevertheless, Rousseau, Sitkin, Burt, andCamerer (1998) were able to extract common themes inthe different conceptual definitions of trust to propose aconsensus definition as follows: “Trust is a psychologicalstate comprising the intention to accept vulnerabilitybased on positive expectations of the intentions or behav-iors of another” (p. 395).Note that there are two parts to this definition. First,trust relates to (positive) expectations about the intentionsand/orbehaviorsoftheexchangepartner.Oftenreferredtoas the “expectancy” conceptualization of trust, it focuseson one’s beliefs that the exchange partner would act in amanner that is responsible, evidences integrity, and is notpotentially injurious. Second, trust relates to one’s inten-tionstorelyontheexchangepartneracceptingthecontex-tual vulnerability. Referred to as the “behavioral” concep-tualization of trust, it focuses on one’s action tendenciestoward exchange partners. Indeed, these conceptualiza-tions are related as implied by the preceding definition,sincebehavioralintentionsinvolveweighingexpectationsofapartner’sbehaviorsagainstanindividual’svulnerabil-ity in the exchange, among other factors. In the marketingliterature, however, researchers have argued against com-bining the expectancy and behavioral conceptualizationsof trust, presumably because keeping them separate pro-vides opportunities to study trust processes (Morgan andHunt 1994). This view has support in the management lit-erature as well (Lewicki, McAllister, and Bies 1998). Inaccordwiththis,throughoutthisarticle,wemaintainadis-tinction between expectations and behavioral intentions .Moreover, because expectations usually precede inten-tions,weusetheexpectancyconceptualizationoftrustformuch of our discussion unless noted otherwise.Althougheffortstowardaconsensualdefinitionoftrusthave been successful, some researchers have argued thatthe resulting conceptualizations are so “stretched” thattheyhavelimitedusefulnessforconceptualand/orempiri-cal work (Bigley and Pearce 1998). Following Osigweh(1989), the notion of the concept stretching relates to aconstruct that is defined at a high level of abstraction andhas both a large bandwidth (i.e., broad coverage) and awide connotation (i.e., lumping of too many classes of things with little attribute precision). Problems in band-width and connotative specification of trust concep-tualizations can lead different researchers working withdifferent conceptual meanings of trust to accumulate acommon body of work. Recognizing the confusion thatthismightcreate,BigleyandPearce(1998)haveimploredresearchers to shift their focus from such questions as“whatistrust?”to“whichtrustandwhen?”(p.406).Heed-ing this call, we further specify the domain and connota-tive meaning of the trust construct in the context of ourstudy. Following this, we discuss the implications of trustfor agency problems in consumer exchanges. Specifying the Trust Constructfor Consumer Exchanges Three sources of specification are identified withregard to the consumer trust construct. First, situationalandcontextualfactorsarelikelytodeterminetherelevanceofthetrustconstructinconsumerexchanges.Thatis,trustis not a necessary ingredient for consummatingconsumer-firm exchanges, just as the presence of distrustdoes not in and of itself preclude consummation. Rather,situations will vary by the degree to which they evoke therelevanceoftrustandtriggermechanismsthatareaffectedby the level of trust. Specifically, trust-relevant exchangesarecharacterizedby(a)ahighlevelofperformanceambi-guity(e.g.,consumers’evaluationsofserviceperformanceare highly ambiguous), (b) significant consequentiality(e.g., service performance has significant consequencesfor the value derived by the consumer), and (c) greaterinterdependence (e.g., when the consumer participates inthe process of exchange performance) (Sitkin and Roth1993).Second, connotative specification is likely to influencetheconceptualizationoftheconsumertrustconstruct,thatis, specifying the attributes with an appropriate level of precision so that the trust construct achieves meaningful-ness across multiple domains. Defining trust in globalterms without any attribute specification (e.g., by itemssuchas,“Itrustmyserviceprovider”)maybeproblematicbecausedifferentconsumersmayscoresuchitemsequiva-lently even when they use distinctly different attributes to judge trust. 4 By contrast, a highly precise specificationmayyieldatrustconstructwithsomanyattributesthatitispragmatically cumbersome. Often, an intermediate preci-sion level involving specification of salient attributes isthought to be desirable.Severalresearchershaveprovidedanintermediatelevelof connotative specification for the trust construct. Forinstance, in the context of buyer-seller relationships,GanesanandHess(1997)proposetwodimensionsoftrust:(1)credibility,orthefocalpartner’sintentionandabilitytokeep promises; and (2) benevolence, or evidence of thefocal partner’s genuine concern for the partner throughsacrifices that exceed a purely egocentric profit motive 154 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE WINTER 2000
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