Networks, Trust and Institutional Complementarities

This paper provides a contribution to the definition of endogenous conditions that induce cooperative behaviour and trust in a principal-agent model with adverse selection. Differently from the standard literature, the paper shows that the principal can actively generate trust and cooperation by the agent. It is assumed that the latter's utility function includes self-esteem among its variables. Therefore when the principal pays a gift or a monetary transfer of adequate magnitude, failure to reciprocate generates disutility to the agent. The optimal contract with trust, thus defined, is com-pared with alternative solution and the role of complementary institutions is stressed.