IFin Seminar, Francesco D'Acunto, Boston College "Trust and Contracts: Empirical Evidence"
Institute of Finance
Date: / -
Seminar Title: "Trust and Contracts: Empirical Evidence"
Prof Francesco D'Acunto, Boston College
12:25 - 13:40
Auditorium (main building, 3rd level)
Contract theory posits an effect of trust between contracting parties on contract completeness. Two opposite predictions emerge. On the one hand, lower trust might decrease completeness by increasing the cost of negotiating contract clauses. On the other hand, lower trust might increase completeness, because parties might not trust each other's reaction to unplanned events. Parties might thus be willing to pay the higher upfront costs of negotiating more clauses. Using a unique sample of U.S. principal-agent consulting contracts and a negative shock to trust between contracting parties staggered across space and over time, we show that lower trust increases contract completeness. Trust affects both principals and agents-contracts in low-trust environments include more non-compete clauses and are less likely to compensate agents with equity. The effects of lower trust persist and do not revert during our sample period. Results are similar across several proxies of contract completeness, contract characteristics, and do not obtain when agents are company insiders or in other falsification tests.