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Contractual incompleteness as a signal of trust

  • Herold, Florian
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    This paper shows how the fear of signaling distrust can endogenously lead to incomplete contractual agreements. We consider a principal agent relationship where the agent may be trustworthy (dedicated to the project) or not. The principal may trust the agent (i.e. have a high belief of facing a trustworthy agent), or distrust him. The proposal of a complete contract, including fines and other explicit incentives, is shown to signal distrust. When trust is important in some non-contractible part of the relationship, a principal may prefer to leave the contract incomplete rather than to signal distrust by proposing a complete contract. Contractual incompleteness arises endogenously due to asymmetric information about how much one partner trusts the other side.

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    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 68 (2010)
    Issue (Month): 1 (January)
    Pages: 180-191

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    Handle: RePEc:eee:gamebe:v:68:y:2010:i:1:p:180-191
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