Contracts and Trust
47 Pages Posted: 15 Feb 2016
There are 3 versions of this paper
Contracts and Trust
Date Written: February 10, 2016
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.
Keywords: D86, K12, C91
JEL Classification: breach, contract, contract enforcement, experiment, risk, social preference, trust
Suggested Citation: Suggested Citation