Finance & Accounting Marketing Aug 2, 2007

Trust Required Here

Trust in both the seller and the marketplace is necessary for buyer confidence

Based on the research of

Kent Grayson

Devon Johnson

Der-Fa Chen

Buying a used car is always a difficult experience, in large part because potential buyers have trouble trusting sellers. Trust is an elusive but important component in market transactions. New work by Kent Grayson, a marketing professor at the Kellogg School of Management, and his colleagues focuses on the pension industry in the United Kingdom and Taiwan, and shows that a buyer requires two types of trust: trust in the particular seller (narrow-scope trust) and trust in the broader social context, the market in which the transaction takes place (broad-scope trust).

Grayson says his interest in the topic was prompted by a pension scandal in the United Kingdom while he was living there in the late 1990s, which resulted in a “crisis of trust” in the marketplace. For six years, financial advisors had systematically given poor advice to nearly 1.5 million UK customers, creating widespread doubts about the trustworthiness of financial institutions and their supervisory agencies. Recent corporate scandals in the United States, such as those involving Enron, Qwest Communications, and Martha Stewart, had a similar impact. This led Grayson to ask: “If you lose trust in an industry, will you also lose trust in individual providers in that industry?”

There are two competing views on the relationship between narrow-scope trust and broad-scope trust. Some scholars have argued that they are substitutes for each other, while others have argued that broad-scope trust simply encourages the development of narrow-scope trust. Grayson and his co-authors, Devon Johnson (Northeastern University) and Der-Fa Chen (National Sun Yat-Sen University), tested both these theories empirically.

More specifically, to test whether the pension scandals had created wide variations in trust among customers, they surveyed customers who had bought pensions from four major financial services companies in the United Kingdom (three companies and 586 customers) and Taiwan (one company and 261 customers). They chose Taiwan to complement their study in the United Kingdom because they wanted to see if their findings would hold in different cultural contexts.

The authors distinguished between two types of broad-scope trust: system trust and generalized trust. “System trust” results from the belief that third parties (government regulatory bodies, professional associations, and the legal system) will intervene if trust in a particular firm is broken. In the Taiwan survey, for example, they included some questions about the Financial Investment and Trust Association, a professional association in that country known for setting standards of conduct in the industry. “Generalized trust” refers to trust in people in general.

Though Taiwanese customers reported a different average level of trust in the business context, the substantive results from the United Kingdom study were replicated in the Taiwan study. Both studies support the prediction that there is a positive and statistically significant correlation between customers’ trust in specific firms and in the marketplace. Further, both studies show that narrow-scope trust mediates the relation between broad-scope trust and variables that measure customer satisfaction and customer purchases. They approximated the latter concept by the reported fraction of total investment invested with the particular financial advisor. Figures 1 and 2 provide simplified diagrams of the models that best fit the data.

Figure 1: Path model for the United Kingdom

Figure 2: Path model for Taiwan

In other words, broad-scope trust functions similarly in both cultures: customer trust in the market plays an indirect role while customer trust in specific firms and relationships plays a critical, mediating role. Neither trust can substitute for the other. In fact, according to the authors, the greater the broad-scope trust, the more relationships dependent on narrow-scope trust are likely to benefit.

These results suggest that trust in the fair practices of financial institutions in general encourages trust in specific financial advisors. The more customers trust the general practices of the industry, the more trusting they will be when arriving at a financial advisor’s offices. However, customer trust in the specific business and its representatives must then be earned.

Managers may worry that if they work to foster broad-scope trust in their industry, they will only help their competitors, creating an opportunity for “free-riding.” However, the authors show that this is unwarranted. As broad-scope trust only supports narrow-scope trust, even if the level of broad-scope trust is high, firms must foster their customers’ specific trust in them.

Further research might study the causes of broad-scope trust. The research team discussed several sources of broad-scope trust described in the literature, including formal institutions that regulate trustworthiness in individual relationships, as well as more informal mechanisms such as networks of personal ties. Previous research has suggested that communication and experience are important sources of narrow-scope trust and may also have an impact on broad-scope trust. Grayson believes it might be useful to look at psychological perspectives to better understand the causes of broad-scope trust. Familial background and upbringing, the general disposition to trust, and socioeconomic status can influence broad-scope trust, and studying these influences might further illuminate the role broad-scope trust plays in the marketplace.

Featured Faculty

Kent Grayson

Associate Professor of Marketing; Bernice and Leonard Lavin Professorship

About the Writer

Rachel Kontorovich, a doctoral student in the Philosophy Department at the Weinberg College of Arts and Sciences, Northwestern University.

About the Research

Grayson, Kent, Devon Johnson, and Der-Fa Chen (2008). “Is Firm Trust Essential in a Trusted Environment? How Trust in the Business Context Influences Customers.” Journal of Marketing Research, 45(2): 241-256.


Editor’s Picks


Podcast: How to Be a Great Mentor

Plus, some valuable career advice that applies to just about everyone.


A New Way to Persuade Kids to Drink More Water and Less Soda

Getting children to make healthy choices is tricky—and the wrong message can backfire.


How Can Social Science Become More Solutions-Oriented?

A conversation between researchers at Kellogg and Microsoft explores how behavioral science can best be applied.


Buying a Company for Its Talent? Beware of Hidden Legal Risks.

Acquiring another firm’s trade secrets—even unintentionally—could prove costly.


Take 5: Tips for Widening—and Improving—Your Candidate Pool

Common biases can cause companies to overlook a wealth of top talent.


Everyone Wants Pharmaceutical Breakthroughs. What Drives Drug Companies to Pursue Them?

A new study suggests that firms are at their most innovative after a financial windfall.


4 Key Steps to Preparing for a Business Presentation

Don’t let a lack of prep work sabotage your great ideas.


Video: How Open Lines of Communication Can Improve Healthcare Outcomes

Training physicians to be better communicators builds trust with patients and their loved ones.


Here’s a Better Way to Schedule Surgeries

A new tool could drive savings of 20 percent while still keeping surgeons happy.

Politics & Elections

Why Economic Crises Trigger Political Turnover in Some Countries but Not Others

The fallout can hinge on how much a country’s people trust each other.


Building Strong Brands: The Inside Scoop on Branding in the Real World

Tim Calkins’s blog draws lessons from brand missteps and triumphs.


How the Coffee Industry Is Building a Sustainable Supply Chain in an Unstable Region

Three experts discuss the challenges and rewards of sourcing coffee from the Democratic Republic of Congo.