The Boundaries of Trust and Risk: The Quadratic Moderating Role of Institutional Structures

A prevalent assumption in the literature is that trust and risk are always relevant in online marketplaces, and that there is always a need to build trust and reduce risk irrespective of context. Challenging this assumption, this study seeks to identify the boundaries of the effects of trust and risk on transaction activity in the context of institutional structures in online marketplaces. The perceived effectiveness of institutional structures (PEIS), defined as the extent buyers believe that appropriate conditions are in place to facilitate transactions with sellers, sets the boundaries of trust and risk by moderating their effects on transaction activity in a quadratic (inverted‐U) fashion. Specifically, at the lower boundary condition of PEIS (among buyers who believe institutional structures are ineffective), the high situational uncertainty they perceive should make these buyers unwilling to become vulnerable to sellers, thus rendering trust and risk immaterial to their decision making. Trust and risk should also be immaterial at the higher boundary condition of PEIS (among buyers who believe institutional structures are very effective), because the insufficient situational uncertainty makes trust and risk irrelevant to these buyers' decision making because of a lack of vulnerability. Only between these two boundary conditions (among buyers who perceive moderate levels of PEIS), and thus a moderate degree of situational uncertainty and vulnerability in the marketplace, should trust and risk have a significant effect on transaction activity. Data from 398 buyers on eBay's and Amazon's online marketplaces support the quadratic moderating role of PEIS on the effect of risk on transaction activity, but not on the effect of trust. Theoretical and practical implications on specifying the boundaries of the effects of trust and risk and understanding the direct and moderating role of institutional structures are discussed.