Trust and contracts: Empirical evidence

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: LawFin Working Paper ; No. 32

Classification and Topics

• Classification: Wirtschaft ; Economics of Contract: Theory ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Compensation Packages; Payment Methods ; Transactional Relationships; Contracts and Reputation; Networks ; Cultural Economics; Economic Sociology; Economic Anthropology: General
• Subject: 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

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): D'Acunto, Francesco ; Xie, Jin ; Yao, Jiaquan
• Event: Veröffentlichung
• (who): Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)
• (where): Frankfurt a. M.
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/261462
• URN: urn:nbn:de:hebis:30:3-651738
• Last update: 10.03.2025, 11:42 AM CET