Trust and Contracts: Empirical Evidence

Abstract

How does trust affect contract completeness? If contracting parties were suspicious about each others' reactions to unplanned contingencies, they might pay higher negotiation costs to complete contracts ex-ante. Meanwhile, mistrust might lead to prohibitively high negotiation costs and less complete contracts (or no contracts altogether). Using a unique sample of U.S. consulting contracts, text-based-analysis measures of contract completeness, and a shock to trust between shareholders/managers (principals) and consultants (agents) staggered across space and time, we find lower trust increases contract completeness. The clauses added to contracts after trust drops related to potential observable and verifiable misbehavior by agents or principals.
  

Keywords: Empirical Contract Theory, Incomplete Contracts, Cultural Economics, Beliefs and Choice, Personnel Economics, Organizational Economics, FinTech and Textual Analysis, Consulting, Management, Non-Compete Agreements, Big Five, Fraud, Accounting, Disclosure

JEL Classification: D86, D91, J33, L14, Z10