Trust, contract and economic cooperation

After providing a brief overview of the standard economic analysisof incomplete contracts in terms of property rights, transactioncosts and self-enforcing implicit contracts, the author showswhy, in the orthodox view, trust is not a pertinent categoryto their negotiation or effectiveness. Drawing on various empiricalstudies which he has undertaken in the area of industrial relations,the author develops an alternative approach to the study ofincomplete contracts in which the concept of trust is central.In this alternative vision, boundedly rational agents with limitedforesight form provisional judgements about the trustworthinessof their trading partners based on the success of their pastencounters. A consequence of this alternative understandingof incomplete contracts is that there is no guarantee that cooperationwill succeed, even when the circumstances appear to promisemutual gain. The author argues, however, that by establishingan appropriate set of procedural rules to guide their responseto the unanticipated, agents can promote the kinds of mutuallearning that contribute to the build-up of trust and that increasethe likelihood of successful cooperation.