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Contracts and trust: complements or substitutes?

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  • MCCANNON, BRYAN C.
  • ASAAD, COLLEEN TOKAR
  • WILSON, MARK

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, enforceable contracts substitute when the social preferences of trust and trustworthiness are lacking. We explore the alternative hypothesis that trust and contract enforcement are complements. We measure social preferences from both a Trust Game and a social values survey, using them as explanatory variables 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 important interaction effect, where trusting individuals enter into agreements at a greater rate and make larger investments when enforcement is greater. Thus, contracts and trust complement one another.

Suggested Citation

  • Mccannon, Bryan C. & Asaad, Colleen Tokar & Wilson, Mark, 2018. "Contracts and trust: complements or substitutes?," Journal of Institutional Economics, Cambridge University Press, vol. 14(5), pages 811-832, October.
    • Handle: RePEc:cup:jinsec:v:14:y:2018:i:05:p:811-832_00
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    Cited by:

    1. Niclas Berggren & Christian Bjørnskov, 2023. "Does legal freedom satisfy?," European Journal of Law and Economics, Springer, vol. 55(1), pages 1-28, February.
    2. Yanlong Zhang & Wolfram Elsner, 2020. "Social leverage, a core mechanism of cooperation. Locality, assortment, and network evolution," Journal of Evolutionary Economics, Springer, vol. 30(3), pages 867-889, July.
    3. Knetsch, Andreas & Salzmann, Astrid, 2022. "Societal trust and corporate underinvestment," Global Finance Journal, Elsevier, vol. 54(C).
    4. Gregory DeAngelo & Bryan C. McCannon, 2020. "Psychological game theory in public choice," Public Choice, Springer, vol. 182(1), pages 159-180, January.
    5. Pasiouras, Fotios & Samet, Anis, 2022. "Social capital and the cost of bank equity: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 141(C).
    6. McCannon, Bryan C. & Minuci, Eduardo, 2020. "Shill bidding and trust," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    7. Brandon N. Cline & Claudia R. Williamson, 2020. "Trust, regulation, and contracting institutions," European Financial Management, European Financial Management Association, vol. 26(4), pages 859-895, September.
    8. Graafland, Johan & de Jong, Eelke, 2022. "The moderating role of culture on the benefits of economic freedom: Cross-country analysis," Journal of Comparative Economics, Elsevier, vol. 50(1), pages 280-292.

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