Contracts and Trust

47 Pages Posted: 15 Feb 2016

See all articles by Bryan C. McCannon

Bryan C. McCannon

Illinois Wesleyan University

Colleen Tokar Asaad

Baldwin Wallace University

Mark Wilson

Saint Bonaventure University

Multiple version iconThere are 3 versions of this paper

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

McCannon, Bryan C. and Asaad, Colleen Tokar and Wilson, Mark, Contracts and Trust (February 10, 2016). Available at SSRN: https://ssrn.com/abstract=2730909 or http://dx.doi.org/10.2139/ssrn.2730909

Bryan C. McCannon (Contact Author)

Illinois Wesleyan University ( email )

P.O. Box 2900
Bloomington, IL 61702-2900
United States

HOME PAGE: http://sites.google.com/site/bryancmccannon

Colleen Tokar Asaad

Baldwin Wallace University ( email )

Mark Wilson

Saint Bonaventure University ( email )

Saint Bonaventure, NY 14778
United States

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