The complementarity between trust and contract enforcement

Björn Bartling, Ernst Fehr, David Huffman and Nick Netzer

No 377, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Agreements are rarely fully enforceable, exposing trading parties to some risk of exploitation. In such circumstances, trust — defined as the belief in the trustworthiness of others — seems important for realizing gains from trade. This paper explores an unstudied question: whether trust is a substitute for, or a complement to, the availability of contract enforcement opportunities. One intuition suggests that trust becomes more important when contract enforcement is weak, implying that they are substitutes. We show, however, that trust can be a complement, mattering more when contract enforcement is stronger. Our evidence comes from experiments that exogenously vary both trust and contract enforcement. We argue that the mechanism is equilibrium selection: richer opportunities for contract enforcement can lead to a wider set of equilibria. Trust can then become more important because it helps select between efficient and inefficient equilibria. We provide empirical evidence for this mechanism, and a corresponding theoretical framework. The complementarity of trust and strength of contract enforcement has important policy implications.

Keywords: Trust; contract enforcement; complementarity; equilibrium selection; causal effect; screening; belief distortions; institutions (search for similar items in EconPapers)
JEL-codes: C91 D02 D91 E02 (search for similar items in EconPapers)
Date: 2021-01, Revised 2024-10
New Economics Papers: this item is included in nep-cta, nep-exp, nep-hpe, nep-mac, nep-mic and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:377

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