Quantitative Research Methods
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Pavlou et al./Understanding & Mitigating Uncertainty
MIS Quarterly Vol. 31 No. 1 pp. 105-136/March 2007
105
R
ESEARCH
A
RTICLE
U
NDERSTANDING AND
M
ITIGATING
U
NCERTAINTY IN
O
NLINE
E
XCHANGE
R
ELATIONSHIPS
:
A
P
RINCIPAL
–
A
GENT
P
ERSPECTIVE
1
By:
Paul A. Pavlou
A. Gary Anderson Graduate School
of Management
University of California, Riverside
Riverside, CA 92521
U.S.A.
paul.pavlou@ucr.edu
Huigang Liang
College of Business
Florida Atlantic University
Fort Lauderdale, FL 33308
U.S.A.
hliang@fau.edu
Yajiong Xue
College of Business
Florida Atlantic University
Fort Lauderdale, FL 33308
U.S.A.
yxue@fau.edu
Abstract
Despite a decade since the inception of B2C e-commerce, the
uncertainty of the online environment still makes many con-
sumers reluctant to engage in online exchange relationships.
1
Elena Karahanna was the accepting senior ed
itor for this paper. D. Harrison
McKnight and Jonathan D. Wareham se
rved as reviewers. The associate
editor and the third reviewer chose to remain anonymous.
Even if uncertainty has been widely touted as the primary
barrier to online transactions, the literature has viewed
uncertainty as a “background” mediator with insufficient
conceptualization and measurement. To better understand
the nature of uncertainty and mitigate its potentially harmful
effects on B2C e-commerce adoption (especially for important
purchases), this study draws upon and extends the principal-
agent perspective to identify and propose a set of four
antecedents of perceived uncertainty in online buyer–seller
relationships—perceived information asymmetry, fears of
seller opportunism, information privacy concerns, and
information security concerns—which are drawn from the
agency problems of adverse selection (hidden information)
and moral hazard (hidden action).
To mitigate uncertainty in online exchange relationships, this
study builds upon the principal–agent perspective to propose
a set of four uncertainty mitigating factors—trust, website
informativeness, product diagnosticity, and social presence—
that facilitate online exchange relationships by overcoming
the agency problems of hidden information and hidden action
through the logic of signals and incentives.
The proposed structural model is empirically tested with
longitudinal data from 521 consumers for two products (pre-
scription drugs and books) that differ on their level of pur-
chase involvement. The results support our model, delin-
eating the process by which buyers engage in online exchange
relationships by mitigating uncertainty. Interestingly, the
proposed model is validated for two distinct targets, a specific
website and a class of websites.
Implications for understanding and facilitating online ex-
change relationships for different types of purchases, miti-
Pavlou et al./Understanding & Mitigating Uncertainty
106
MIS Quarterly Vol. 31 No. 1/March 2007
gating uncertainty perceptions, and extending the principal–
agent perspective are discussed.
Keywords
: Uncertainty, agency theory, adverse selection,
hidden information, moral h
azard, hidden action, fears of
seller opportunism, information asymmetry, information pri-
vacy, information security, trust, website informativeness,
product diagnosticity, social presence, book purchasing,
online prescription filling
Introduction
The potential benefits of business-to-consumer (B2C) e-
commerce adoption—the consumer’s engagement in online
exchange relationships with sellers—have been widely touted.
However, despite the decade that has passed since the incep-
tion of B2C e-commerce, uncertainty still makes many buyers
reluctant to engage in online exchange relationships with
sellers, especially for high-involvement purchases.
2
To better understand the nature of uncertainty and mitigate its
potential harmful role in e-commerce proliferation, we refer
to the
principal–agent perspective
, which aims to explain
transactional arrangements between self-interested parties
with incongruent goals in the presence of uncertainty. The
principal–agent perspective, which builds upon the original
formulation of agency theory, has been extended by Nobel-
winning information economists (Akerlof 1970; Rothschild
and Stiglitz 1976; Spence 1973) to markets of imperfect
information. Moreover, agency theory has been extended to
virtually all types of transactional exchanges that occur in a
socio-economic system where information asymmetry, fears
of opportunism, and bounded rationality exist (Milgrom and
Roberts 1992).
The principal–agent perspective has also been applied to
buyer–seller relationships (e.g., Bergen et al. 1992; Mishra et
al. 1998; Singh and Sirdeshmukh 2000), typically viewing
buyers as principals and sellers as agents. This is because
buyers (principals) delegate the delivery responsibility to
sellers (agents) who typically have more information about
their characteristics, products, and practices. Uncertainty
arises since the buyer cannot fully monitor the seller’s
behavior, leading to two information problems: adverse
selection (hidden information) and moral hazard (hidden ac-
tion) (Akerlof 1970; Arrow 1985; Jensen and Meckling
1976).
Hidden information
refers to pre-contractual misrepre-
sentation of the seller’s true attributes (seller quality uncer-
tainty), and offering false product information (product
quality uncertainty).
Hidden action
refers to the seller’s post-
contractual shirking, contract
default, and fraud (seller quality
uncertainty), and reducing the promised quality of product
offerings (product quality uncertainty).
The principal–agent perspective is a useful theoretical lens for
understanding and mitigating perceived uncertainty in online
exchange relationships for severa
l reasons: First, the concepts
of hidden information and hidden action help us identify the
sources of uncertainty in online buyer–seller relationships.
Second, the principal–agent perspective provides specific
ways to reduce uncertainty, through its logic of signals and
incentives, which can be extended to mitigate uncertainty
perceptions in online buyer–seller relationships. Third, the
theoretical assumptions of information asymmetry, fears of
opportunism, and bounded rationality are applicable to
buyer–seller relationships. Finally, from an IS standpoint, the
principal agent perspective maintains that uncertainty percep-
tions are determined by specific information problems (i.e.,
hidden information and hidden action) that could be poten-
tially mitigated with the proper use of information systems.
Most notably, Eisenhardt (1989, p. 70) suggested that the
“next steps for agency theory research are straightforward:
Researchers should focus on information systems, outcome
uncertainty, and risk
” (emphasis in original).
Drawing upon and extending the principal–agent perspective,
we propose four factors that spawn uncertainty perceptions in
online exchange relationships:
3
First, the spatial and temporal
separation among buyers and sellers creates information
asymmetries to the seller’s advantage, giving rise to the
buyer’s
perceived information asymmetry
. Second, goal
incongruence and the temporal separation between payment
and delivery create concerns that the product may not be as
promised or that sellers may exploit buyers, thus giving rise
to buyer’s
fears of seller opportunism
. Finally, the global and
open Internet infrastructure allows the buyer’s private and
monetary information to be easily collected, processed, and
used by sellers, giving rise to buyer’s
information privacy
concerns
and
information security concerns
.
Having understood the key sources of uncertainty (perceived
information asymmetry, fears of seller opportunism, informa-
tion privacy concerns, and information security concerns), this
study aims to prescribe how they can be mitigated by re-
2
Purchase involvement refers to the intrinsic importance of a product to the
buyer (Howard and Sheth 1969).
3
Following the principal–agent pers
pective, the proposed sources of
uncertainty are specific to the dyadic buyer–seller relationship, and we do not
examine uncertainty due to environmenta
l conditions or third parties that are
outside the seller’s control.
