Trust and Contracts: Empirical Evidence

62 Pages Posted: 3 Dec 2020

See all articles by Francesco D'Acunto

Francesco D'Acunto

Georgetown University

Jin Xie

Peking University HSBC Business School

Jiaquan Yao

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Date Written: 2020


Trust between parties should drive the negotiation and design of contract: if parties did not trust each others' reaction to unplanned events, they might agree to pay higher costs of negotiation to complete contracts. Using a unique sample of U.S. principal-agent consulting contracts and a negative shock to trust between parties staggered across space and over time, we find that lower trust increases contract completeness. Not only contract complexity but also the verifiable states of the world contracts cover increase after a drop in trust. The results hold for several text-analysis-based measures of completeness and do not arise when agents are also principals (shareholders) or in other falsification tests. Non-compete agreements, confidentiality and indemnification clauses, and restrictions to agents' actions are more likely to be added to contracts signed in the same locations, same industries, and same years after a negative shock to trust.

JEL Classification: D860, D910, J330, L140, Z100

Suggested Citation

D'Acunto, Francesco and Xie, Jin and Yao, Jiaquan, Trust and Contracts: Empirical Evidence (2020). CESifo Working Paper No. 8714, Available at SSRN: or

Francesco D'Acunto (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Jin Xie

Peking University HSBC Business School ( email )

Jiaquan Yao

affiliation not provided to SSRN

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