Trust, Contract and Economic Cooperation

After providing a brief overview of the standard economic analysis of incomplete contracts in terms of property rights, transaction costs and self-enforcing implicit contracts, the author shows why, in the orthodox view, trust is not a pertinent category to their negotiation or effectiveness. Drawing on various empirical studies which he has undertaken in the area of industrial relations, the author develops an alternative approach to the study of incomplete contracts in which the concept of trust is central. In this alternative vision, boundedly rational agents with limited foresight form provisional judgements about the trustworthiness of their trading partners based on the success of their past encounters. A consequence of this alternative understanding of incomplete contracts is that there is no guarantee that cooperation will succeed, even when the circumstances appear to promise mutual gain. The author argues, however, that by establishing an appropriate set of procedural rules to guide their response to the unanticipated, agents can promote the kinds of mutual learning that contribute to the build-up of trust and that increase the likelihood of successful cooperation. Copyright 1999 by Oxford University Press.