Trust and contracts: empirical evidence

  • 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.

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Author:Francesco D'AcuntoORCiDGND, Jin Xie, Jiaquan Yao
Parent Title (English):LawFin working paper ; No. 32
Series (Serial Number):LawFin Working Paper (32)
Publisher:Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/07/12
Tag:Accounting; Beliefs and Choice; Big Five; Consulting; Cultural Economics; Disclosure; Empirical Contract Theory; FinTech and Textual Analysis; Fraud; Incomplete Contracts; Management; Non-Compete Agreements; Organizational Economics; Personnel Economics
Issue:June 2022
Page Number:61
The paper benefited significantly from a fellow visit of Francesco D’Acunto at the Center for Advanced Studies on the Foundations of Law and Finance funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG)-project FOR 2774.
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Wissenschaftliche Zentren und koordinierte Programme / DFG-Forschergruppen / Foundation of Law and Finance
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
3 Sozialwissenschaften / 34 Recht / 340 Recht
Licence (German):License LogoDeutsches Urheberrecht