Contracts and Trust

Social preferences and formal contract enforcement are two mechanisms that facilitate performance of an agreement. The standard argument is that formal contracting substitutes when social preferences are lacking. We, alternatively, explore the hypothesis that social preferences and contract enforcement are complements. We measure social preferences from a standard Trust Game and use it is an explanatory variable in a Contract Game. We find that both increased contract enforcement and high trusting preferences lead to enhanced rates of contract formation and larger investments. There is an interaction effect where trusting individuals make larger investment agreements. Thus, contracts and social preferences complement one another