The Complementarity Between Trust and Contract Enforcement

Abstract Agreements are rarely fully enforceable, exposing trading parties to the risk of exploitation. In such cases, trust—defined as the belief in the trustworthiness of others—may be key to realizing gains from trade. This paper asks whether trust substitutes for or complements contract enforcement. While intuition may suggest trust matters more when enforcement is weak, our experiment, which exogenously varies both trust and enforcement, shows it can matter more when enforcement is strong. The mechanism is equilibrium selection: stronger enforcement allows more equilibria, and trust helps select efficient ones. This complementarity between trust and enforcement has important policy implications.