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 :

May 27 2019

Last revised :

April 23 2019
SSRN Share

Keywords

  • Social trust • 
  • innovation • 
  • economic growth • 
  • Incomplete contracting

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, particularly in industries with high innovation potentials. Trust plays an especially important role in promoting innovation when formal laws and regulations are lacking.

We find that trust facilitates innovation by encouraging collaboration, fostering tolerance for failure, and easing firms’ access to capital. Our evidence highlights innovation as a key conduit through which trust affects economic growth.

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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