Document Type

Working Paper

Publication Date

5-1-2015

College/Unit

Chambers College of Business and Economics

Document Number

15-15

Department/Program/Center

Economics

Abstract

Social preferences and third-party enforcement of formal contracts are two mechanisms that facilitate performance of an agreement. The standard argument is that formal contracting substitutes when social preferences are lacking. We explore the hypothesis that social preferences and contract enforcement are complements. We measure social preferences from a 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, specifically when enforcement is greater. Thus, contracts and social preferences complement one another.

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Economics Commons

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