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Trust and contracts: Empirical evidence

Francesco D'Acunto, Jin Xie and Jiaquan Yao

No 32, LawFin Working Paper Series from Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)

Abstract: Trust between parties should drive contract design: if parties were suspicious about each others' reaction to unplanned events, they might agree to pay higher costs of negotiation ex ante to complete contracts. Using a unique sample of U.S. consulting contracts and a negative shock to trust between shareholders/managers (principals) and consultants (agents) staggered across space and over time, we find that lower trust increases contract completeness. Not only the complexity but also the verifiable states of the world covered by contracts increase after trust drops. The results hold for several novel text-analysis-based measures of contract completeness and do not arise in falsification tests. At the clause level, we find that non-compete agreements, confidentiality, indemnification, and termination rules are the most likely clauses added to contracts after a negative shock to trust and these additions are not driven by new boilerplate contract templates. These clauses are those whose presence should be sensitive to the mutual trust between principals and agents.

Keywords: Empirical Contract Theory; Incomplete Contracts; Cultural Economics; Beliefs and Choice; Personnel Economics; Organizational Economics; FinTech andTextual Analysis; Consulting; Management; Non-Compete Agreements; Big Five; Fraud; Accounting; Disclosure (search for similar items in EconPapers)
JEL-codes: D86 D91 J33 L14 Z10 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-acc, nep-cta, nep-hrm, nep-pay and nep-soc
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Citations: View citations in EconPapers (1)

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