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Contracts and Trust

Listed author(s):
  • Bryan C. McCannon

    (West Virginia University, College of Business and Economics)

  • Colleen Tokar Asaad

    (Baldwin-Wallace University)

  • Mark Wilson

    (Saint Bonaventure University)

Registered author(s):

    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.

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    File URL: http://busecon.wvu.edu/phd_economics/pdf/15-15.pdf
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    Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 15-15.

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    Length: 43 pages
    Date of creation: May 2015
    Handle: RePEc:wvu:wpaper:15-15
    Contact details of provider: Postal:
    P.O. Box 6025, Morgantown, WV 26506-6025

    Phone: (304) 293-7859
    Fax: (304) 293-2233
    Web page: http://business.wvu.edu/graduate-degrees/phd-economics
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