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Social exchange theory

Dr. Simon Moss

Overview

Social exchange theory was promulgated by scholars like Emerson (1976& see also Ekeh, 1974) in the 1970s. According to social exchange theory, as individuals interact over time, they experience the need to reciprocate the support and assistance of the other person, called the norm of reciprocity (see Blau, 1983& Gouldner, 1960). For example, if one person helps a friend, this friend will experience an obligation to reciprocate at some time in the future, offering a form of assistance that is equal in magnitude. If this norm of reciprocity is fulfilled, a trusting and loyal relationship evolves (Cropanzano & Mitchell, 2005).

Individuals experience a strong urge to reciprocate favors. Indeed, individuals feel more motivated to reciprocate a favor than most benefactors actually predict (see Flynn, 2003& McGuire, 2003).

Social exchange theory, however, highlights some subtle complications that compromise relationships. For example, if individuals help someone else, they expect a favor in return that is comparable to the cost, effort, or inconvenience of this act. In contrast, if individuals receive assistance, they return a favor that is comparable to the benefit or gain they enjoyed as consequence of this act--almost regardless of the cost or inconvenience (Zhang & Epley, 2009).

This principle can elicit resentment in relationships. If individuals offer support that was very inconvenient to them, but not especially beneficial to the other person, they will expect a major facor, but receive a trivial favor, in return. They will, thus, tend to experience a sense of resentment, which can compromise the stability and trust of their relationship with this person.

In short, social exchanges are sometimes perceived as unjust by one or both parties. Benefactors, for example, might feel their assistance was not reciprocated sufficiently. Such perceived inequities can elicit conflict (Sulthana, 1987), emotional distress (Bakker, Schaufeli, Sixma, Bosveld, & van Dierendonck, 2000), or physical illness (cf., Siegist, 2005).

Properties and complications of social exchange

When individuals engage in economic exchanges, the value of goods and services is explicit. Customers, for example, may be told that a product costs $50. These customers, therefore, know they must pay $50 or offer some other goods or services of the same value.

When individuals engage in social exchanges, however, the value of some action or behavior cannot be determined with precision or clarity. When individuals offer assistance to someone else, the level of support they demand in return is uncertain (Browm 1986). Instead, the recipient must estimate the subjective value of this assistance and reciprocate accordingly (Messick & Sentis, 1983).

Sometimes, the benefactor and recipient of assistance value some act differently. Benefactors, for example, might feel their assistance of someone was very valuable. The recipients, however, might feel this assistance was trivial. As a consequence, they might not return the favor adequately. The benefactors might feel this exchange was inequitable (cf., Adams, 1965), which provokes resentment.

Egocentric biases

Zhang and Epley (2009) uncovered a key source of possible inequities. To estimate the value of some act, benefactors primarily orient their attention to the most salient property of this behavior: the cost or effort that was incurred. If some form of assistance was arduous, risky, inconvenient, expensive, or costly in some other sense, benefactors will perceive this act as elevated in value and expect a significant favor in return. If some form of assistance was simple and effortless, in contrast, the benefactors will perceive their own behavior as not especially valuable and expect a modest favor in return.

In contrast, according to Zhang and Epley (2009), to estimate the value of an act, recipients primarily orient their attention to the property that is salient from their perspective: the benefit or gain they received. The recipients are less cognizant of the cost. If they felt the assistance improved their life appreciably, the recipients will perceive the act as particularly valuable and will intend to offer a significant favor in return. If they felt the assistance did not improve their life, the recipients will perceive the act as trivial and might not even return the favor.

Obviously, a problem arises when the assistance is costly but not beneficial. The benefactor will expect a sizeable favor in return. The recipient, in contrast, will not intend to return the favor to a large extent. The benefactor, thus, will feel the exchange was inequitable.

Zhang and Epley (2009) conducted a series of studies to substantiate these arguments. In the first study, participants imagined they were the benefactor or recipient of some favor. The favor was either very costly--such as waiting in line to purchase baseball tickets for 2 hours--or not as costly--such waiting in line for 30 minutes. The benefit was either pronounced--for example, the seats were excellent--or minor--that is, the seats were obscured. Next, if participants had imagined they were the benefactor, they predicted the money that should be spent on a gift to show gratitude. If participants had imagined they were the recipient, they predicted the money they should spend on this gift.

Consistent with hypotheses, benefactors expected a sizeable gift only if the act was costly. In contrast, recipients purchased a sizeable gift only if the act was beneficial (Zhang & Epley, 2009).

The second study was similar, except participants reflected on actual social exchanges. They were instructed, for example, to recall favors they had offered or received. Next, they estimated the costs and benefits of this favor on a rating scale. In addition, if they had been the benefactor, they specified the money that should be spent on a gift to show gratitude. If they had been the recipient, they predicted the money they should spend on this gift. Again, the results supported the hypotheses. Furthermore, for benefactors, the expected gift correlated with the perceived cost. For recipients, the gift correlated more with the perceived benefit (Zhang & Epley, 2009).

The same pattern of results was also observed in a laboratory setting. Interestingly, the favor that benefactors expected was still dependent on the perceived costs of their assistance--even when they knew the recipient was oblivious to this cost (Zhang & Epley, 2009). Furthermore, in another study, when estimating the value of some assistance, recipients disregarded the costs even when the money that benefactors spent was explicit (Zhang & Epley, 2009). In addition, this disparity between benefactors and recipients dissipated if participants adopted the perspective of the other person.

Interestingly, the behavior of both benefactors and recipients diverged from their own explicit standards. Indeed, benefactors believed they should consider the benefits, instead of the costs, of some act when deciding the value of favors they should receive in return. Recipients believed they should primarily consider the costs of assistance, instead of the benefits, when reflecting upon how they should reciprocate--the converse of their actual behavior (Zhang & Epley, 2009).

Any factors that encourage individuals to adopt the perspective of someone else, therefore, should diminish the potential inequities of social exchange. Many factors can incite someone to adopt this perspective, such as the extent to which they like this individual (Frantz & Janoff-Bulman, 2000) or adopt an interdependent orientation (e.g., Wu & Keysar, 2007).

The effect of time

As Flynn (2003) showed, the perceived value of assistance changes over time. That is, initially, recipients might perceive the assistance as higher in value than do the benefactors. Days or weeks after the act, however, this pattern tends to reverse. Benefactors perceive the assistance as higher in value that do the recipients.

Idiosyncratic deals

Often, in the workplace, employees have not developed a strong relationship with their supervisors or colleagues. That is, they do not feel respected or supported by these people. Consequently, according to social exchange theory, they will not feel obliged to act supportively or helpfully in return, curbing the likelihood of organizational citizenship behavior.

To compensate, according to Anand, Vidyarthi, Liden, and Rousseau (2010), managers should offer these employees special provisions, called idiosyncratic deals or i-deals. They might, for example, offer these employees opportunities to undertake training, skill development, and career development--opportunities that are not usually available to other colleagues. Alternatively, they might offer flexible working relationships that, also, are not usually available.

Nevertheless, managers also need to ensure these offers are not perceived as unjust. These managers might argue these idiosyncratic deals are experimental and may, one day, be implemented across the workgroup. They might refer to other circumstances that are unique to that person, and so forth.

Anand, Vidyarthi, Liden, and Rousseau (2010) showed that, in general, employees who are granted these idiosyncratic deals, especially around training and development, were more likely to exhibit organizational citizenship behaviors--particularly if their relationship with their supervisor was not strong. Specifically, in this study, employees completed questionnaires that assess whether they have formed a strong relationship with their supervisor or teammates. Their supervisor then assessed the extent to which these employees exhibit organizational citizenship behaviors that are intended to assist other people or to help the organization. Furthermore, the supervisor answered questions that assessed whether or not these employees were granted opportunities to undertake training, skill development, and career development that are not usually available to other colleagues.

As hypothesized, employees granted these idiosyncratic deals were more likely to engage in organizational citizenship behaviors, such as assisting colleagues or defending the organization. If employees had not formed a strong relationship with their supervisor, this association was especially pronounced. Furthermore, if the employees had not formed a strong relationship with their teammates, employees granted these idiosyncratic deals were especially likely to engage in organizational citizenship behaviors that enhance the organization. Accordingly, idiosyncratic deals might represent an opportunity for managers to offer resources in lieu of strong interpersonal support. This provision then encourages reciprocation from employees.

Diversity of exchange

Although idiosyncratic deals can be effective, whenever leaders form a stronger relationship with some employees than with other employees, a variety of problems can ensue. To illustrate, two individuals, John and Jack, may have formed a strong, trusting, and respectful relationship with each other. If John, but not Jack, has also formed a strong relationship with Fred, a tension or dissonance can develop. Jack, for example, might not be as willing to share his feelings to John, concerned this disclosure might be communicated to Fred. Other problems can also unfold.

To override these tensions, individuals like to form more symmetrical relationships. If two individuals have formed a strong relationship with each other, they are more likely to develop similar feelings as each other towards another person. Conversely, if two individuals have not formed a strong relationship with each other, they prefer to develop different feelings towards another person (Sherony & Green, 2002).

These principles are pertinent to the workplace. Suppose a leader, for example, has formed a strong relationship with one employee but not with another employee. To override any dissonance, these two employees will feel disinclined to form a strong association with one another& otherwise, tensions might be elicited. Thus, leaders that form strong associations with only a subset of employees will compromise the level of cohesion within the workgroup, ultimately reducing commitment to the team and organization, as Sherony and Green (2002) confirmed.

Power and uncertainty

Disparities in power can compromise cohesion in social networks. To illustrate, in some networks, as Schaefer (2009) emphasizes, a particular form of imbalance in power, called exclusion, is prevalent. For example, sometimes one person can derive a particular resource from two other individuals. This person, therefore, will tend to exchange resources with one individual and exclude the other individuals. Jane, for example, can purchase the same coffee, at the same price, from both Jack and Fred. When Jane purchases coffee from Jack, she excludes Fred. The excluded person tends to offer greater concessions to redress this imbalance in power.

Exclusion can promote uncertainty. First, because of these discrepancies in power, the powerful party might not always act fairly. That is, the powerful party might exploit the other party. Exchanges, therefore, are not always successful, trust does not evolve, and uncertainty is experienced. Second, exclusion reduces the frequency of interactions between each pair of individuals.

The frequency of exchanges can then affect uncertainty. If individuals frequently exchange resources, such as support, advice, information, goods, or money, they become more familiar with each other. The behavior of each person is predictable. Uncertainty declines.

Uncertainty can then compromise cohesion. That is, uncertainty coincides with negative emotions, impeding commitment to the relationships. Certainty, in contrast, enhances cohesion. Thus, the prevalence of exclusion, a form of power, undermines certainty, and disrupts relationships.

In addition to cohesion, ordering represents another form of power than can affect cohesion. Sometimes, individuals cannot utilize one resource until they secure another resource. They might not be able to vote until they can secure their citizenship. In this instance, the office that awards citizenships occupies a position of power, because people cannot proceed without their approval. This imbalance in power is unpleasant and thus can also compromise cohesion.

Schaefer (2009) undertook a study to investigate these possibilities as well as several other hypotheses. In this study, teams of five participants completed a task in which they communicated over computer. Each participant was designated a letter to obscure their name. The participants each began with a particular token, representing a resource, like goods or information. They were permitted to exchange the token with only a subset of these five participants. Some participants could exchange resources with only two other participants& some participants could exchange resources with three other participants.

In some teams, if participants received a token from one person, they could not then distribute that resource to anyone else. In other teams, this constraint was relaxed. Furthermore, in some teams, once participants sent the resource to someone else, they had to relinquish this token. In other conditions, they could retain the tokens they exchanged.

In addition, to assess cohesion, participants rated the degree to which they felt the exchanges were harmonious and united rather than adversarial and uncommitted. To assess uncertainty, participants were asked to specify the extent to which they felt their interactions were uncertain, unpredictable, or stable. To gauge exclusion, a formula was utilized. This formula represents the proportion of times two participants could have, but did not, exchange tokens because one of these individuals exchange tokens with someone else. Finally, to measure ordering, the experimenter identified the number of instances in which someone could not seek a resource until they secured another resource.

As predicted, exclusion was positively associated with uncertainty, which in turn was associated with the frequency of interactions. Frequency of interactions predicted cohesion. Furthermore, even after frequency of interactions was controlled, ordering was negatively related to cohesion. Thus, if individuals are sometimes excluded from exchanges, or cannot seek a resource until they secure another resource, they do not perceive their networks to be cohesive.

Exclusion and ordering also varied across the conditions. That is, as Schaefer (2009) identified, resources can be differentiated by two key dimensions: whether or not they are transferable and whether or not they are duplicable. To illustrate, after individuals receive some resource, such as a toy or some information, they can sometimes transfer these provisions to someone else. These resources are transferrable. In contrast, other resources, like a cup of coffee or affection cannot as readily be transferred. Furthermore, some resources, like affection or information, can be distributed to many people. These resources are called duplicable. Other resources, like coffee or a toy, can be distributed to only one person at a time.

Although the results were complex, when the resources were neither transferrable nor duplicable, like a cup of coffee, exclusion was common. If the resources were transferrable, like toys or information, moderate levels of exclusion still emerged but more sizeable levels of ordering prevailed.

Reflections on helping rather than receiving

According to social exchange theory, when people recognize they have received assistance from someone, they feel obliged to help in return. Yet, they feel obliged to help only the benefactor of their assistance and not other individuals. Consequently, after individuals reflect upon times in which they received assistance from someone, they do not necessarily become more cooperative and charitable in general. Indeed, as Grant and Dutton (2012) showed, people are more cooperative and charitable after they reflect upon times in which they helped, rather than received assistance, from someone else.

Specifically, in one study, reported by Grant and Dutton (2012), a set of participants, all of whom were fund raisers, wrote diary entries for 15 minutes on four consecutive days. Some participants wrote about times at work in which they received some benefit and felt grateful. Other participants wrote about times at work in which they helped someone else who was likely to feel grateful. If participants wrote about times in which they helped someone, rather than received assistance, they telephoned 29% more people to seek funds. This behavior is charitable, because the income they received was unrelated to the number of people they telephoned.

In a second study, some participants wrote about three recent experiences in which they received benefits from other people. Other participants wrote about recent experiences in which they helped other people. Finally, in the control condition, some participants wrote about three foods they consumed recently. If participants wrote about times in which they helped other people, they were twice as likely to donate money to a cause a couple of weeks later.

Arguably, when people reflect upon times in which they helped someone else, they are more likely to perceive themselves as helpful. Furthermore, individuals do not like to contradict their perception of themselves. In contrast, when people receive help, they may feel dependent and vulnerable. Further research, however, is needed to clarify the mechanism that underpins these findings.

Implications of social exchange

If possible, individuals should identify opportunities to offer assistance that is beneficial to the other person but nevertheless not costly to perform. If they do engage in an act that is costly, inconvenient, or expensive, they should ask the recipient a question like "What would you have done in this situation?" This question encourages recipients to adopt the perspective of benefactors and reinforces the salience of these costs. As a consequence, the recipient is more likely to return the favor.

Implications of social exchange to work engagement

Eisenberger, Huntington, Hutchison, and Sowa (1986) developed a model, derived from social exchange theory, to explain how the support of organizations affects the behavior of employees. According to this model, called organizational support theory, employees form a global perception of the extent to which the organization cares about their wellbeing and demonstrates appreciation, called perceived organizational support. If the employees perceive the organization as supportive, they feel an obligation to return this support (Rhoades & Eisenberger, 2002). In particular, they return this support in the form of attitudes and behaviors that enhance the organization.

Consistent with this premise, research indicates that perceived organizational support is related to many desirable behaviors in employees. When perceived organizational support is elevated, absenteeism diminishes (Rhoades & Eisenberger, 2002) and turnover dissipates (Allen, Shore, & Griffeth, 2003).

Few studies, however, have examined whether the benefits of perceived organizational support are underpinned by a perceived obligation to reciprocate, as assumed by organizational support theory. One exception is a study conducted by Eisenberger, Armeli, Rexwinkel, Lynch, and Rhoades (2001). This study showed that perceived organizational support did indeed evoke an obligation to reciprocate--called felt obligation--which in turn was related to affective commitment.

Organizations are especially likely to be perceived as supportive if they offer provisions that extend beyond their legal obligations. For example, some organizations offer leave provisions and other favorable job conditions merely to align with government regulations or union demands. Other organizations offer provisions that extend beyond these standards. When organizations transcend these standards, they are perceived as supportive. Consistent with this supposition, Eisenberger, Cummings, Armeli, and Lynch (1997) showed that favorable job conditions are seven times more likely to correlate positively with perceived organizational support when such rewards are regarded as discretionary rather than obligatory.

Many studies have explored the determinants of perceived organizational support. For example, perceived organizational support is significantly related to perceived supervisory support (e.g., Rhoades, Eisenberger, & Armeli, 2001& Yoon & Lim, 1999)--the extent to which the supervisor of employees cares for their wellbeing. The correlation between these variables tends to approximate or exceed .50 (e.g., Shanock & Eisenberger, 2006). That is, supervisors are regarded as representatives of the organization. Hence, the support of these supervisors offers a signal that perhaps the organization is also supportive.

In addition, the extent to which employees receive the rewards and recognition they deserve, called distributive justice, as well as the degree to which the processes to determine rewards and recognition are fair, called procedural justice, is a key determinant of perceived organizational support (Wayne, Shore, Bommer, & Tetrick, 2002). Presumably, these forms of justice might represent discretionary acts of support and thus shape evaluations of perceived organizational support. Furthermore, in addition to the fairness of rewards and recognition, the level of rewards and recognition also correlate with perceived organizational support (Rhoades, Eisenberger, & Armeli, 2001). Finally, other provisions are also associated with perceived organizational support. To illustrate, training and development opportunities seem to be related to perceived organizational support (Wayne, Shore, & Liden, 1997).

Similarly, social exchange theory has been applied by Saks (2006) to explain the sources of work engagement. Saks (2006) maintained that engagement in employees might represent a form of obligation to the organization. That is, if organizations offer support to their employees, these individuals feel obliged to become cognitively, emotionally, and physically engaged in their work role. They feel they should direct constructive behaviors, such as positive attitudes, towards the organization. Consistent with this perspective, when organizations do offer support and resources, employees do indeed report elevated levels of engagement (for a review, see Saks, 2006).

Nevertheless, as Saks (2006) conceded, some forms of social support or resources do not magnify engagement. Reward and recognition, for example, are not related to engagement after perceived organizational support and other job characteristics are controlled. Furthermore, social exchange theory does not specify the mechanisms that relate individual characteristics to work engagement. Nevertheless, neuroticism and extraversion are indeed related to engagement (Langelaan, Bakker, Doornen and Schaufeli, 2006).

The benefits of effective human resource systems

Social exchange theory has been applied to explain the beneficial effects of human resource systems on organizational performance. In short, according to Piening, Baluch, and Salge (2013),organizations implement a range of human resource systems, including constructive performance appraisal, development programs, opportunities to contribute ideas, mentoring or support, and suitable job design. When these practices are implemented, individuals feel they are supported and trusted by the organization, rather than merely exploited as a means to secure more immediate economic gains. In return, these employees developed commitment to the organization and accept complications, often manifesting as job satisfaction. When employees are satisfied with their jobs, they often exhibit positive emotions and maintain effort, usually translating to satisfied customers and ultimately improvements in firm performance.

Piening, Baluch, and Salge (2013) conducted a study that verifies these assertions. Participants were employees of public hospitals in England and were assessed annually over five years. They first specified the degree to which the hospitals provide various human resource practices, such as constructive performance appraisal and development programs. In addition, participants completed measures of job satisfaction. Finally, satisfaction of customers and profitability were ascertained for each hospital.

Several key findings were uncovered. First, the positive association between human resources systems at one time and customer satisfaction later was mediated by job satisfaction. Second, customer satisfaction at one time was subsequently associated with profitability. Third, the benefits of human resource systems to job satisfaction declined after a year or two. Fourth, increases in profitability were related to subsequent improvements in human resource systems, potentially generating a positive feedback loop. Finally, increases in customer satisfaction were associated with subsequent increases in job satisfaction.

The size of these effects was pronounced. A one standard deviation increase in customer satisfaction corresponded to an increase in profitability by .149 standard deviations after one year and .3 standard deviations after 2 years.

The relationship between organizational structure and fairness

Social exchange theory has been applied to explain how organizational structure, such as the degree to which decisions are centralized and the level of formalization, affects perception of justice. In particular, Schminke, Cropanzano, and Rupp (2002) utilized this theory to explain an interesting pattern of results.

In this study, participants from a variety of organizations completed scales that assess various features of their organization, such as the extent to which decisions are centralized to senior managers or distributed across the organization as well as the degree to which the rules and procedures of the organization are formalized and written. In addition, these individuals completed questions that gauge the level of distributive, procedural, and interactional justice. Distribute justice refers to whether the rewards or recognition are fair. Procedural justice refers to whether the practices and procedures to reach these decisions are just rather than biased. Interactional justice refers to whether managers share information openly and show respect when communicating.

In general, limited centralization--corresponding to more participation in decisions and opportunity to assume initiative--and pronounced formalization were positively associated with justice. Importantly, these relationships were not as pronounced, however, in employers at more senior levels.

Presumably, as individuals become more senior, their relationships with managers are more relational than transactional. That is, the quality of relationships is stronger. According to social exchange theory, as the quality of relationships strengthens, individuals tend to evaluate information, such as decisions from management, less harshly. They exchange the respect they have received with trust and leniency.

Related topics

Karmic investments

Sometimes, people do not exchange resources with other individuals but with the universe. That is, they feel that, provided they offer something to the universe, they may receive something in return, analogous to the concept of Karma. This possibility, called Karmic investment, explains a variety of interesting findings. To illustrate, when people wait for some outcome they cannot control but is important to them, such as the results of a medical test, they are more likely to behave altruistically. Presumably, they sacrifice their own needs to support the universe primarily, but perhaps unconsciously, to receive assistance in return.

In one study, for example, reported by Converse, Risen, and Carter (2012), some participants were asked to write about a time in which they were waiting to learn about an unknown outcome that was important to their lives, such as a decision after a job interview. In the control condition, participants merely described their daily routines. After writing about a time in which they were waiting to learn about an unknown outcome that was important to their lives, participants were more likely to donate to various charities. Presumably, they sacrificed their needs, in this instance their money, to support the universe, hoping to receive assistance in return. A subsequent study showed that such donations diminished whenever participants did feel a sense of personal control or did not perceive the outcome as especially important.

Likewise, in another study that was conducted by Converse, Risen, and Carter (2012), job seekers at a job fair were asked to indicate the extent to which they experience a sense of control over various activities. For some participants, the activities that were specified could readily be controlled by job seekers, such as learning about the industry. For other participants, the activities that were specified could not be controlled by job seekers, such as increases in job vacancies. If these participants had reflected upon only activities that could not be controlled, they were later more likely to donate to a charity. A subsequent study showed that participants who were then granted an opportunity to donate were more confident about their job prospects as well. They felt, on some level, the universe would provide.

Dual pathway model of respect

In team or group settings, individuals sometimes receive respect from other members, including leaders. That is, they are sometimes perceived favorably. Other individuals might not be respected by other members. This disrespect may compromise both engagement and participation as well as undermine wellbeing.

According to the dual pathway model of respect, proposed and validated by Huo, Binning, and Molina (2010), two pathways underpin the benefits of this respect. First, according to the group based model (Lind & Tyler, 1988& Tyler, Degoey, & Smith, 1996) as well as the relational model of authority (Tyler & Lind, 1992), individuals tend to assume the respect they receive symbolizes their status in the group. If they are treated respectfully and fairly, especially by managers, they feel they must be elevated in status. That is, they feel their skills and talents are perceived as valuable to the organization or workgroup. This perception increases their confidence in their skills, promoting self esteem, engagement, and participation in the group.

Second, individuals tend to assume the respect they receive also demonstrates whether they are liked and included. If they are treated respectfully, particularly from peers, they feel a sense of inclusion or belonging. According to the sociometer hypothesis, this sense of inclusion also increases self esteem and wellbeing.

This model was first validated in a high school. Students answered questions about whether they are perceived as high in status, epitomized by questions like "Most of the time I feel the people at school respect my achievements", as well as liked, epitomized by questions like "Most of the time I feel the people at school feel warmly towards me". In addition, the extent to which they feel they are treated fairly by teachers and classmates was also assessed. Furthermore, the extent to which students identify with the school and attempt to help the school in some way was evaluated. Finally, self esteem and mental health was assessed, with questions like the extent to which they have been "a very nervous person" over the last year.

Consistent with the dual pathway model of respect, both fair treatment from teachers and peers were associated with perceived status and liking. The fair treatment from teachers was especially relaed to status rather than liking, however. Furthermore, perceived status was associated with the degree to which students identify with the school and attempt to help the school in some way as well as self esteem and mental health. Perceived liking, however, was associated with self esteem and mental health but not attempts to help the school in some way.

Long term orientation in business relationships

According to social exchange theory, a business may cooperate with another business to reciprocate previous support. Lui and Ngo (2010) uncovered another motivation to demonstrate this support and establish enduring relationships: risk minimization. That is, long-term relationships may represent a form of governance.

To illustrate, in some instances, an organization depends heavily on another company, such as a supplier of important goods, called asset specificity. For example, on surveys, these organizations may endorse items such as "If this partner were to switch to one of our competitors, it would be a big loss to us". In these instances, the supplier could exploit their power and, for example, increase prices dramatically.

To prevent this threat, organizations may commit to enduring relationships with these suppliers. They might, for example, commit to long-term contracts. The suppliers, therefore, are more likely to feel the relationship will persist into the future, and their behavior will thus be more honorable.

Furthermore, at other times, the market is uncertain and erratic. Demand changes unpredictably. In these times, contracts are often ambiguous, and suppliers can exploit this ambiguity. They may interpret contracts in a way that benefits themselves. Committed, enduring relationships could also prevent this exploitation.

Lui and Ngo (2010) confirmed these possibilities. They showed that asset specificity and market uncertainty were positively associated with long-term commitment to suppliers, as gauged by items such as "We expect to work together on future projects". Furthermore, when organizations established these committed relationships, suppliers were not as likely to breach agreements.

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