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Contracts and trust: complements or substitutes?

Published online by Cambridge University Press:  06 November 2017

BRYAN C. MCCANNON ,
COLLEEN TOKAR ASAAD  and
MARK WILSON
BRYAN C. MCCANNON*
Affiliation:
West Virginia University, Morgantown, WV, USA
COLLEEN TOKAR ASAAD*
Affiliation:
Baldwin-Wallace University, Berea, OH, USA
MARK WILSON*
Affiliation:
Saint Bonaventure University, Saint Bonaventure, NY, USA
*
*Email: [email protected]
**Email: [email protected]
***Email: [email protected]
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Abstract

Social preferences and third-party enforcement of formal contracts are two mechanisms that facilitate performance of an agreement. The standard argument is that formal, enforceable contracts substitute when the social preferences of trust and trustworthiness are lacking. We explore the alternative hypothesis that trust and contract enforcement are complements. We measure social preferences from both a Trust Game and a social values survey, using them as explanatory variables 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 important interaction effect, where trusting individuals enter into agreements at a greater rate and make larger investments when enforcement is greater. Thus, contracts and trust complement one another.

Type
Research Article
Information
Journal of Institutional Economics , Volume 14 , Issue 5 , October 2018 , pp. 811 - 832
Copyright
Copyright © Millennium Economics Ltd 2017 

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