The effects of contracts on interpersonal trust

Administrative Science Quarterly,  Sept, 2002  by Deepak Malhotra,  J. Keith Murnighan

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Research on interpersonal trust development has largely focused on the role of accumulated firsthand knowledge of others and suggests that trust depends in large part on the parties' interaction history (e.g., Lindskold, 1978; Lewis and Weigert, 1985; Boon and Holmes, 1991). As Kramer (1999: 575) noted, "interaction histories give decision makers information that is useful in assessing others' dispositions, intentions, and motives. This information, in turn, provides a basis for drawing inferences regarding their trustworthiness and for making predictions about their future behavior." Regardless of the level of presumptive trust that each party might bring to a relationship, or the extent to which categories or third parties enhance perceptions of trustworthiness, repeated cooperative interactions provide a central means for building or increasing trust. (1)

For interpersonal trust and its antecedent attributions to develop, however, cooperative interaction is not sufficient. Cooperation must also be interpreted as a reflection of the cooperator's disposition or motives rather than to other, situational factors (cf. Gambetta, 1988). A person who has no choice but to cooperate would not be said, on this basis alone, to be trustworthy. Trust can only develop when the parties have an incentive and an opportunity not to cooperate. If one party cooperates under such conditions, the other party may reasonably attribute trustworthiness to him or her. This logic suggests that formal structures that restrict the behavior of actors might preclude the development of positive dispositional attributions. Thus, the presence of a contract that restricts exploitation and opportunism may make trust development difficult.

Agreeing to either binding or non-binding contracts indicates a willingness to cooperate and encourages individuals to follow through on their stated commitments (cf. Kerr and Kaufman-Gilliland, 1994). Thus, both types of contracts should facilitate cooperation. The two types of contracts differ, however, in the constraints that they impose. While binding contracts restrict the ability to renege, non-binding contracts entail greater risk. By eliminating or greatly reducing risk, binding contracts should enhance cooperation more than non-binding contracts. The elimination of risk associated with binding contracts, however, may limit an individual's ability to attribute positive or benevolent intentions to a cooperative counterpart, eliminating a primary mechanism of trust development. In contrast, individuals who cooperate when their actions are less restricted (i.e., after agreeing to non-binding contracts) can still build trust on the basis of personal attributions for their volitional cooperation.

Binding contracts. Truly binding contracts ensure that each party will follow through on his or her commitments. Thus, if one party proposes a binding contract and the other party accepts, the two can eliminate the risk of opportunism or exploitation and enjoy a mutually beneficial exchange. Having the option to use binding contracts, then, can be mutually beneficial. This suggests: