The problem: who is worthy of trust when performance is hard to measure, and opportunism is easy to hide?

Aleksandr Solzhenitsyn noted in The Gulag Archipelago,“the line separating good and evil passes not through states, nor between classes, nor between political parties either — but right through every human heart — and through all human hearts.” In the context of economic exchange, one worries not so much about “evil,” but rather opportunism, that is lying, free riding, shirking, etc. Specifically, the problem of who is worthy of trust arises when we, as economic agents, want to engage in some kind of transaction with others, and is magnified when it is difficult to measure whether the person we trusted has betrayed us by acting opportunistically. Manifestation of this “betrayal” problem for peer groups such as cooperatives can be fatal to their existence. If members of such groups could identify where that line dividing opportunism and honesty lay in other members, concerns of having their trust betrayed would fade. However, as Nobel laureate Oliver Williamson has repeatedly noted, knowing where that line lies is a hard problem, and thus peer groups rarely, if ever, survive without some form of external support. But as our investigation of one of the world’s most famous and enduring photo agencies, Magnum Photos, published in Journal of Management Studies shows, the problem is not unsurmountable.

The solution: values-based trust as an antidote for opportunism

The findings from our investigation of Magnum, organized as a cooperative of freelancer photographers, indicate that the key to addressing the problem of who is worthy of trust, especially when performance cannot be precisely measured and acts of opportunism may pass undetected, lies not in some risk-probability calculus but in observing the manifestation of shared values over time – those who refuse to partake in acts that promise a higher payoff because it violates their deeply held values can be relied on to not act opportunistically. In contexts where creativity is paramount and tasks cannot be performed algorithmically, screening based on shared values can give rise to values-based trust that attenuates concerns of opportunism. In fact, value-based trust can promote a spirit of generosity whereby members of a group freely help each other and care deeply about the survival of the organization to the extent that they are willing to make some personal sacrifices for its furtherance.

Additionally, organizations that screen prospective members based on shared values also promote innovation – since members know that they have discretion and their risk-taking will not be seen as an act of opportunism, they are more likely to engage in more creative endeavors. Of course, this discretion is balanced with responsibility – undertaking risk is a personal decision with the fruits of rewards and failures being accrued to the individual. Furthermore, such peer-groups are restricted in size because with an increase in size, maintaining homogeneity of values becomes problematic.

Practical implications

Our findings suggest that risk-taking agents can organize collectively in small numbers by screening for opportunism over a long period time (e.g., 4-6 years and 2-3 stages before granting full membership) based on shared values. Doing so is likely to give rise to values-based trust within the peer-group as long as it is complemented by members holding decision rights and property rights over their own work. Such peer-groups are best suited when they are in the “Goldilocks zone,” that is they have between 30 to 50 members. Organizing in this manner can be especially advantageous in creative industries or any other industry where outputs and processes are subject to measurement problems.

Image Source: https://www.ibbaka.com/