A Transaction Cost Model of Electronic Trust: Transactional Return, Incentives for Network Security and Optimal Risk in the Digital Economy

Transaction cost economics can explain the mechanism by which network security technologies may reduce the interexchange costs between businesses in the supply chain and between businesses and customers in the digital economy. This paper develops the construct of technology-based electronic trust, where interpersonal, or “real” trust between people can be amplified and enhanced with the use of network security information technologies. The paper formally models an electronic commerce trust typology based on minimizing the cost of establishing trust in transactions, balanced against maximizing the potential user value from successfully completing transactions in the digital economy, suggesting that there is an optimal amount of acceptable risk in electronic commerce transactions. Sophisticated deployments of security information technologies may increase levels of interpersonal trust while lowering transaction costs in electronic commerce, thus promoting the long run development of neutral, interorganizational electronic markets and growth in the digital economy.