McCannon, Asaad and Wilson, ‘Contracts and Trust’

Abstract:
Social preferences and third-party enforcement of formal contracts are two mechanisms that facilitate performance of an agreement. The standard argument is that formal, enforceable contracts substitute when the social preferences of trust and trustworthiness/reciprocity are lacking. We explore the hypothesis that trust and contract enforcement are complements. We measure social preferences from a Trust Game and use it is an explanatory variable in a contract game. We find that both increased contract enforcement and high trusting preferences lead to enhanced rates of contract formation and larger investments. There is an interaction effect where trusting individuals make larger investment agreements, specifically when enforcement is greater. Thus, contracts and trust complement one another.

McCannon, Bryan C and Asaad, Colleen Tokar and Wilson, Mark, Contracts and Trust (February 10, 2016).

First posted 2016-02-16 07:28:47

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