Trust and Contracts: Empirical Evidence

61 Pages Posted: 20 Jun 2022 Last revised: 3 Jul 2023

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 1, 2022

Abstract

Trust between parties should shape contract design: if parties were suspicious about each others' reaction to unplanned events, they might pay higher negotiation costs to complete contracts ex-ante. Using a unique sample of U.S. consulting contracts, novel text-based-analysis measures of contract completeness, 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. Non-competes, details about equity compensation, indemnification, termination, and confidentiality clauses are added to contracts after trust drops.

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 1, 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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