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01 Mar 2003

Trust Me

Topics: Research-Research and DevelopmentNegotiation-Agreements and ArrangementsNegotiation-Negotiation Participants
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The old adage “get it in writing” may be sound advice, but if you are looking to build trust, you might want to think twice about signing a contract. Recent research by HBS assistant professor Deepak Malhotra and Keith Murnighan (of the Kellogg School of Management) suggests that binding contracts can erode trust. As the pair write in “The Effects of Contracts on Interpersonal Trust,” forthcoming in the Administrative Science Quarterly, those who engage in nonnegotiable contracts often attribute their counterpart’s cooperative actions to the existence of the contract rather than to his or her level of integrity.

“You build trust when you are vulnerable. If the person you are dealing with has an incentive to harm you but comes through and does not, then you learn to trust him or her,” Malhotra explained in a recent interview. “But when a contract is there and the person cooperates, you might attribute the cooperation to the existence of the contract. This will inhibit the development of trust.”

In an experiment where subjects interfaced with a computer program that Malhotra and Murnighan designed to test trust, the pair found that parties that relied on contracts to achieve cooperation were subsequently less trusting than parties that did not. “When we took the contracts away from those who had used them previously, trust diminished,” Malhotra noted. “In fact, there was less trust in those parties than there was in parties that had never interacted before.” While one would ssume that you are better off interacting with someone with whom you have had positive interactions before, the researchers found that many people placed more trust in complete strangers. “The groups that had no history and had not cooperated before had more trust than the groups that had been cooperating successfully under a binding, strictly enforceable contract,” observed Malhotra.

Whether negotiating a joint venture, a merger, or a prenuptial agreement, Malhotra believes that nonbinding (or less binding) contracts may be one way to solve the problem of risk while simultaneously building trust. “The aspect of a contract that hurts the building of trust is its binding nature. When I know that you are forced to cooperate, it takes away all of the risk. If I leave some element of risk in, by using a contract that isn’t completely binding — like a verbal agreement or a handshake or a formal contract that does not attempt to delineate every right and responsibility — then we might learn to trust each other.”

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