Trust, Incomplete Contracting, and Corporate Innovation

Trust, Incomplete Contracting, and Corporate Innovation

Fei Xie, Bohui Zhang, Wenrui Zhang

Series number :

Serial Number: 
607/2019

Date posted :

April 24 2019

Last revised :

February 22 2021
SSRN Share

Keywords

  • trust • 
  • innovation • 
  • Incomplete contracting • 
  • Collaboration • 
  • risk-taking

Innovation is a contract intensive economic activity in a world of incomplete contracts. We show that trust mitigates incomplete contracting and enhances innovation by acting as an informal contracting mechanism. Trust plays an especially important role when formal laws and regulations are lacking, and it promotes innovation by encouraging collaboration and fostering tolerance for failure.

Further analyses show that trust also facilitates cross-border technological spillover and innovation collaboration. Overall, our evidence highlights innovation as a key conduit through which trust affects economic growth.

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Published in

Published in: 
Publication Title: 
Management Science forthcoming

Authors

Professor
Real name:
Fei Xie
Research Member
University of Delaware, Lerner College of Business and Economics
Real name:
Bohui Zhang
Real name:
Wenrui Zhang