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Trust, Incomplete Contracting, and Corporate Innovation

Author

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  • Fei Xie

    (University of Delaware, Newark, Delaware 19716; European Corporate Governance Institute, 1000 Brussels, Belgium)

  • Bohui Zhang

    (Chinese University of Hong Kong, Shenzhen, 518172 Shenzhen, China)

  • Wenrui Zhang

    (Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

Abstract

Innovation is a contract-intensive economic activity in a world of incomplete contracts. We show that trust mitigates incomplete contracting and enhances innovation by acting as an informal contracting mechanism. Trust plays an especially important role when formal laws and regulations are lacking, and it promotes innovation by encouraging collaboration and fostering tolerance for failure. Further analyses show that trust also facilitates cross-border technological spillover and innovation collaboration. Overall, our evidence highlights innovation as a key conduit through which trust affects economic growth.

Suggested Citation

  • Fei Xie & Bohui Zhang & Wenrui Zhang, 2022. "Trust, Incomplete Contracting, and Corporate Innovation," Management Science, INFORMS, vol. 68(5), pages 3419-3443, May.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3419-3443
    DOI: 10.1287/mnsc.2021.4055
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