Trust and Contracts: Empirical Evidence

61 Pages Posted: 20 Jun 2022

See all articles by Francesco D'Acunto

Francesco D'Acunto

Georgetown University

Jin Xie

Peking University HSBC Business School

Jiaquan Yao

Jinan University - Management School

Multiple version iconThere are 3 versions of this paper

Date Written: June 2022

Abstract

Trust between parties should drive contract design: if parties were suspicious about each others’ reaction to unplanned events, they might agree to pay higher costs of negotiation ex ante to complete contracts. Using a unique sample of U.S. consulting contracts and a negative shock to trust between shareholders/managers (principals) and consultants (agents) staggered across space and over time, we find that lower trust increases contract completeness. Not only the complexity but also the verifiable states of the world covered by contracts increase after trust drops. The results hold for several novel text-analysis-based measures of contract completeness and do not arise in falsification tests. At the clause level, we find that non-compete agreements, confidentiality, indemnification, and termination rules are the most likely clauses added to contracts after a negative shock to trust and these additions are not driven by new boilerplate contract templates. These clauses are those whose presence should be sensitive to the mutual trust between principals and agents.

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

Suggested Citation

D'Acunto, Francesco and Xie, Jin and Yao, Jiaquan, Trust and Contracts: Empirical Evidence (June 2022). LawFin Working Paper No. 32, Available at SSRN: https://ssrn.com/abstract=4140744 or http://dx.doi.org/10.2139/ssrn.4140744

Francesco D'Acunto (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Jin Xie

Peking University HSBC Business School ( email )

Jiaquan Yao

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

HOME PAGE: http://www.jiaquanyao.com

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