Trust and Contracts: Empirical Evidence

When: 14 Jun 2021, 14:15-15:30
Where: Zoom
Speaker: Francesco D'Acunto

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Meeting ID: 967 5130 1571
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Trust between parties should drive the design of contracts: if parties did not trust each
others' reaction to unplanned events, they might agree to pay higher costs of negotiation
to complete contracts. Using a unique sample of U.S. principal-agent consulting contracts
and a negative shock to trust between parties staggered across space and over time, we fi nd
that lower trust increases contract completeness. Not only contract complexity but also
the veri able states of the world contracts cover increase after a drop in trust. The results
hold for several text-analysis-based measures of completeness and do not arise when agents
are also principals (shareholders) or in other falsi cation tests. Non-compete agreements,
con dentiality and indemni cation clauses, and restrictions to agents' actions are more likely
to be added to contracts signed in the same locations, same industries, and same years after
a negative shock to trust.