Contracts and Trust

Bryan McCannon, Colleen Tokar Asaad and Mark Wilson
Additional contact information
Colleen Tokar Asaad: Baldwin-Wallace University
Mark Wilson: Saint Bonaventure University

No 15-15, Working Papers from Department of Economics, West Virginia University

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 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.

Keywords: contract; experiment; risk; social preference; trust (search for similar items in EconPapers)
JEL-codes: C91 D86 K12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-05
New Economics Papers: this item is included in nep-exp, nep-hpe, nep-law and nep-soc
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Persistent link: https://EconPapers.repec.org/RePEc:wvu:wpaper:15-15

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