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Trust, regulation, and contracting institutions
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Trust, regulation, and contracting institutions

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  • Brandon N. Cline
  • Claudia R. Williamson

Abstract

This paper demonstrates that trust directly influences contracting efficiency. We document that trust reduces demand for contract regulation and positively relates to a high‐quality contracting environment, supporting a substitution hypothesis. Furthermore, contract regulation no longer leads to poor contracting outcomes. These findings suggest that lack of trust significantly explains inefficient contracting institutions. Based on interaction effects, we note that trust could complement formal enforcement in countries with weak regulation. As regulation increases, trust substitutes for contract regulation. Overall, trust positively promotes efficient contracting by reducing burdensome regulation and providing an alternative to formal contract enforcement.

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  • Brandon N. Cline & Claudia R. Williamson, 2020. "Trust, regulation, and contracting institutions," European Financial Management, European Financial Management Association, vol. 26(4), pages 859-895, September.
    • Handle: RePEc:bla:eufman:v:26:y:2020:i:4:p:859-895
    DOI: 10.1111/eufm.12253
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    2. Ali Recayi Ogcem & Ruth Tacneng & Amine Tarazi, 2021. "Trust and Financial Development: Forms of Trust and Ethnic Fractionalization Matter," Working Papers hal-03322592, HAL.
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    4. Claudia R. Williamson, 2021. "Culture, democracy and regulation," Constitutional Political Economy, Springer, vol. 32(1), pages 98-126, March.
    5. Brandon N. Cline & Claudia R. Williamson & Haoyang Xiong, 2022. "Trust, regulation, and market efficiency," Public Choice, Springer, vol. 190(3), pages 427-456, March.
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    8. Pál Czeglédi, 2022. "Why does the confidence in companies, but not the confidence in the government, affect the demand for regulation differently across countries?," Public Choice, Springer, vol. 193(3), pages 211-231, December.

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