Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228879
Authors: 
Bartling, Björn
Fehr, Ernst
Huffman, David
Netzer, Nick
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 377
Abstract: 
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.
Subjects: 
Trust
contract enforcement
complementarity
equilibrium selection
causal effect
screening
belief distortions
institutions
JEL: 
C91
D02
D91
E02
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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