Gauging The Liability in Broken Trust: Relational Contracting and The Consequent Cost

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Conference Proceeding

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If trust were purchasable, how much value you would attribute to it and be willing to incur a cost for safeguarding yourself from its breach? This question is the central theme of this article. The key issue in our discussion is that liability is part of all trust laden relationship and someone has to cover it. In our context, this obligation falls on the underdog. The conditions force the underdog to take a liability above the fair price level, just because the asymmetry of liabilities and limited information self-select the underdog. The adverse selection occurs due to individuals who opt out of insurance (because their willingness to pay is less than the average cost of the insurance). Those who opt out, distort mechanism which makes the price to be the fair price. The result allows the top dog to evade risk at someone else's expense. The article argues, under certain conditions, broken trust breeds a set of strategic issues including over- or under-investment, contractual issues and agency problems.


Presented at CIBER Conference, June 2-4, 2018, Georgia State University, Buck Center, Atlanta, GA

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