Contract design capability as a trust enabler in the pre-formation phase of interfirm relationships

Moving beyond the prevalent notion that relational trust is cultivated through repeated transactions, we argue that relational trust can also be engendered by a partner's contract design capability revealed in the contracting process preceding relationship formation. We conceptualize contract design capability as a dual-dimensional construct, comprising safeguarding capability and coordination capability, which enables firms to design effective contracts befitting transaction attributes. The survey and the scenario-based experiment data, collected from information technology service industry in China, show that both dimensions of a firm's revealed contract design capability can function to engender trust, including goodwill trust and competence trust. Additionally, when the firm's dependence advantage increases, the effects of its revealed contract design capability on goodwill trust decrease but those on competence trust increase. Overall, this paper enriches the trust literature by ascertaining whether and how relational trust can be generated in the pre-formation phase of interfirm relationships.