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The complementarity between trust and contract enforcement

Author

Listed:
  • Björn Bartling
  • Ernst Fehr
  • David Huffman
  • Nick Netzer

Abstract

We show experimentally and theoretically that trust and contract enforcement can be complements, and identify the key mechanisms that drive this complementarity. In our experiments, the effect of improvements in contract enforcement is trust-dependent, and the effect of increases in trust is shaped by the strength of contract enforcement. We identify three key mechanisms underlying this complementarity: (1) heterogeneity in trustworthiness; (2) strength of contract enforcement affecting the ability to elicit reciprocal behavior from trustworthy types, and screen out untrustworthy types; (3) trust beliefs determining willingness to try such strategies.

Suggested Citation

  • Björn Bartling & Ernst Fehr & David Huffman & Nick Netzer, 2021. "The complementarity between trust and contract enforcement," ECON - Working Papers 377, Department of Economics - University of Zurich, revised May 2022.
    • Handle: RePEc:zur:econwp:377
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    File URL: https://www.zora.uzh.ch/id/eprint/195504/13/econwp377.pdf
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    References listed on IDEAS

    as
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    1. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.

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    More about this item

    Keywords

    Trust; contract enforcement; complementarity; equilibrium selection; causal effect; screening; belief distortions; institutions;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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