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Contracts and Trust

Author

Listed:
  • Bryan C. McCannon

    (West Virginia University, College of Business and Economics)

  • Colleen Tokar Asaad

    (Baldwin-Wallace University)

  • Mark Wilson

    (Saint Bonaventure University)

Abstract

Social preferences and third-party enforcement of formal contracts are two mechanisms that facilitate performance of an agreement. The standard argument is that formal contracting substitutes when social preferences are lacking. We explore the hypothesis that social preferences and contract enforcement are complements. We measure social preferences from a Trust Game and use it is an explanatory variable in a contract game. We find that both increased contract enforcement and high trusting preferences lead to enhanced rates of contract formation and larger investments. There is an interaction effect where trusting individuals make larger investment agreements, specifically when enforcement is greater. Thus, contracts and social preferences complement one another.

Suggested Citation

  • Bryan C. McCannon & Colleen Tokar Asaad & Mark Wilson, 2015. "Contracts and Trust," Working Papers 15-15, Department of Economics, West Virginia University.
    • Handle: RePEc:wvu:wpaper:15-15
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    contract; experiment; risk; social preference; trust;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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