Trust and Performance

We show that a principal’s trust in the voluntary performance of the agent has a positive impact on the agent’s motivation to perform well. Before the agent decides on his performance, the principal in our experiment chooses (not) to implement a minimum performance level for the agent, thereby signaling his distrust (trust) that the agent will voluntarily perform above minimum. Under the assumption that the agent is selfish or inequity averse, trust is never optimal and the principal should always demand minimum performance. Almost 71 percent of the principals in our experiment, however, do not demand minimum performance but trust that the agent will perform voluntarily. Moreover, principals who trust induce a higher average performance by the agent and earn higher payoffs than principals who distrust. The positive impact of trust is driven by the fact that the majority of agents reveal so-called distrust averse behavior, i.e., reduce their performance if the principal signals his distrust. Our results shed new light on the possible dysfunctional effects of explicit incentives as well as the puzzling incompleteness of many economic contracts. JEL: C7, C9, M5