Trust, Incomplete Contracting, and Corporate Innovation

57 Pages Posted: 12 Jun 2017 Last revised: 19 Feb 2021

See all articles by Fei Xie

Fei Xie

University of Delaware - Lerner College of Business and Economics; European Corporate Governance Institute (ECGI)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: January 11, 2021

Abstract

Innovation is a contract intensive economic activity in a world of incomplete contracts. We show that trust mitigates incomplete contracting and enhances innovation by acting as an informal contracting mechanism. Trust plays an especially important role when formal laws and regulations are lacking, and it promotes innovation by encouraging collaboration and fostering tolerance for failure. Further analyses show that trust also facilitates cross-border technological spillover and innovation collaboration. Overall, our evidence highlights innovation as a key conduit through which trust affects economic growth.

Keywords: Trust, Innovation, Incomplete contracting, Collaboration, Risk taking

JEL Classification: F39, G39, O31, O47

Suggested Citation

Xie, Fei and Zhang, Bohui and Zhang, Wenrui, Trust, Incomplete Contracting, and Corporate Innovation (January 11, 2021). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 607/2019, Management Science forthcoming, Available at SSRN: https://ssrn.com/abstract=2982888 or http://dx.doi.org/10.2139/ssrn.2982888

Fei Xie

University of Delaware - Lerner College of Business and Economics ( email )

42 Amstel Ave
Newark, DE 19716
United States
(302) 8313811 (Phone)

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

Wenrui Zhang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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