Stronger Contracts, Less Trust
Business agreements are usually secured by written agreements that define the obligations of the parties and state what happens under various conditions. Having been party to a few business deals launched based mostly on enthusiasm and trust, I can certainly vouch for the importance of such agreements. Not everyone relies entirely on extensive documentation, though – oilman T. Boone Pickens famously collected $3 billion when courts upheld his handshake deal to acquire a piece of Getty Oil. And, we find, there’s actually scientific evidence that stronger contracts can reduce trust.
In a paper titled More Order with Less Law: On Contract Enforcement, Trust, and Crowding, researchers Iris Bohnet, Bruno S. Frey and Steffen Huck describe simulates contractual environments in which subjects formed agreements under two conditions: strong enforcement and weaker enforcement. Surprisingly, stronger enforcement didn’t always result in higher levels of successful performance per the agreement. According to the authors, weaker performance “crowds in” trust. In other words, when an agreement is made in an environment of limited contract enforcement, the parties depend on trust to a greater degree and performance can actually increase.
This may sound counter-intuitive, but there are real-world examples of this. Think about the “honor codes” at some schools – rather than trying to build sophisticated monitoring systems to prevent cheating, they do the reverse: they reduce monitoring, and trust the students to adhere to the honor code. Despite the occasional cheating scandal, this approach has been largely effective. On the other hand, contracts in the Soviet era in Russia were extremely specific and tightly enforced; this environment caused both sides to precisely follow the letter of the contract, sometimes to the exclusion of common sense. Meaningless deviations from the exact provisions of the contract became major negotiation points, causing delays and cost overruns with no improvement in the delivered product or service.
The message from this isn’t that businesses and consumers don’t need agreements or contracts – clearly, these documents are a good way to specify what each party will do and they help avoid costly misunderstandings and errors. But, rather than relying on contracts to cover all possible eventualities, in some cases it may be better to avoid haggling over endless paragraphs of legalese it may be better to work on building trust. (At least in the U.S., members of the legal profession are great at coming up with “but what if…?” scenarios, each of which requires lengthening the contract.)
In fact, most people and businesses DO want to hold up their end of the agreements they make. Relying on trust won’t give one party to the bargain a “license to cheat” if they find they can get away with something but remain in compliance with the letter of the contract. And, as we saw in “Trust Your Customer,” offering trust is a way to build mutual trust.