The Complementary Nature of Trust and Contract Enforcement

Arbeitspapier

Under weak contract enforcement the trading parties’ trust, defined as their belief in other’s trustworthiness, appears important for realizing gains from trade. In contrast, under strong contract enforcement beliefs about other’s trustworthiness appear less important, suggesting that trust and contract enforcement are substitutes. Here we show, however, that trust and contract enforcement are complements. We demonstrate that under weak contract enforcement trust has no effect on gains from trade, but when we successively improve contract enforcement, larger effects of trust emerge. Likewise, improvements in contract enforcement generate no increases in gains from trade under low initial trust, but cause high increases when initial trust is high. Thus, the effect of improvements in contract enforcement is trust-dependent, and the effect of increases in trust is dependent on the strength of contract enforcement. We identify three key ingredients underlying this complementarity: (1) heterogeneity in trustworthiness; (2) strength of contract enforcement affecting the ability to elicit reciprocal behavior from trustworthy types, and screen out untrustworthy types; (3) trust beliefs determining willingness to try such strategies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8826

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Institutions: Design, Formation, Operations, and Impact ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Institutions and the Macroeconomy
• Subject: trust ; contract enforcement ; complementarity ; equilibrium selection ; causal effect ; screening ; belief distortions ; institutions

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bartling, Björn ; Fehr, Ernst ; Huffmann, David B. ; Netzer, Nick ; Huffman, David B.
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/232423
• Last update: 10.03.2025, 11:44 AM CET