Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/261462 
Year of Publication: 
2022
Series/Report no.: 
LawFin Working Paper No. 32
Publisher: 
Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin), Frankfurt a. M.
Abstract: 
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.
Subjects: 
Empirical Contract Theory
Incomplete Contracts
Cultural Economics
Beliefs and Choice
Personnel Economics
Organizational Economics
FinTech andTextual Analysis
Consulting
Management
Non-Compete Agreements
Big Five
Fraud
Accounting
Disclosure
JEL: 
D86
D91
J33
L14
Z10
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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