Eisenberg, The notion that the company is a connection between contracts, and Finn's DualNature, 24J. The relationship between the duty of care and the rule of professional discretion is one of the most thorny problems in contemporary company law.
THE IDEA AND EFFICIENCY OF TRUST
One of the most important lessons from the experimental evidence on trust is that trust often depends on social context. Trust and reliability are therefore closely related, with the former depending on the expectations of the latter."'.
Sources of Trust and Trustworthy Behavior
Legal Sanctions
The most obvious reason why Ann might trust Beth is that Ann knows that unreliability could subject Beth to legal sanctions. And both parties must believe that the resulting sanction would be severe enough (after allowing for the possibility that Beth's betrayal would never be discovered or successfully punished) to make the theft unattractive.
Market Sanctions
Indeed, fear of retaliation, loss of reputation, and social sanctions can be important motives for cooperative behavior in many social interactions. In the latter case, Beth needs to know that others can verify that Beth abused Ann's trust (or at least be willing to believe Ann) and will impose costs on Beth by refusing to do business with her and charging her a higher fee to bring. price, or punish her with social sanctions.
Internalized Trust
Second, there are indications that the phenomenon of trust may be related to another, less attractive form of other people's behavior: revenge. Business scholars discussing the role of trust in business relationships often rely on notions of calculative trust, driven by concerns about retaliation and reputation.
The Efficiency of Trust
EXPERIMENTAL EVIDENCE ON TRUST IN SOCIAL DILEMMnAS
The Reality of Trust
Variations in Individual Tendencies to Trust
To develop a better understanding of the cooperative behavior observed in social dilemmas, it is worth exploring another consistent finding of such experiments: different individuals playing the social dilemma game seem to bring different propensities to trust to the table and behave in a trustworthy manner.6 2. One notorious example of this phenomenon can be seen in experiments that found that economics students were significantly less likely than others to participate in social dilemma experiments. the finding that economics graduate students are much less likely than others to participate in social dilemma experiments); see also Sally, supra note 53, at 78 (reporting the results of a meta-analysis of over 100 studies and concluding that psychology majors are much more likely to participate than others, while economics majors are less likely to will participate, although not on a statistically sig-.
High trusters not only expect others to cooperate; they are also much more likely to cooperate themselves.9 Conversely, people who score low on trusting others are themselves more likely to lie, cheat and steal.
Trust as a Learned Behavior
Similarly, people who are trustworthy assume that others are also trustworthy and therefore safe to trust. This result (which, as noted earlier, is inconsistent with the assumption of rational self-interest) appears to be driven by the following peculiar pattern: players' willingness to trust and be trustworthy in repeated social dilemma games deteriorates over time. pattern can be explained as a result of players' initial confidence in the other players' likely cooperation being steadily eroded by experience. If individuals' willingness to trust others and to behave believably toward them can be influenced by such relatively recent experiences, it seems plausible that it can also be influenced by the weight of accumulated past experiences.
Players engaged in a task that requires cooperation are then more likely to cooperate in the dilemma.
The Influence of Social Context
Instructions from Authority
One of the most consistent findings in the social dilemma literature is that players are much more likely to cooperate with each other if the experimenter simply asks them to. This effect is so strong that significant changes in behavior occur when the experimenter even hints at her desires. The first group was told to play "The Community Game". The other group was told to play "The Wall Street Game." Although both groups were presented with identical payoff structures, the different labels produced dramatic differences in behavior.
Only about one-third of players chose to participate in playing "The Wall Street Game." Conversely, more than two-thirds participate when they play the "Community Game".83.
Perceptions of Group Identity
A test of this hypothesis can be found in a series of social dilemma experiments designed by Robyn Dawes, Alphons van de Kragt, and John Orbell."' Groups of fourteen subjects, each given an initial monetary stake, were then randomly divided into two subgroups of seven. 34; Sally, supra note 53, at 68; see also Dawes et al, Cooperation, supra note 53, at 99 ("[E]xperiments have led us to conclude that cooperation rates can be radically de - affected by . . . group identity."); Kramer, supra note 24, at 588 (describing experiments in which arbitrary categorization of individuals into groups "often resulted in individuals viewing outgroup members as less . . . trustworthy"). In contrast, communication slightly reduced cooperation (down to thirty-one percent) among players who had been told that their contributions would benefit their out-group, although this effect was not statistically significant."
Although significant cooperation can occur without overt efforts to create a group identity, strengthening feelings of group identity predictably leads to increases in levels of perceived cooperation."' People are more willing to sacrifice self-interest for "us."
Expectations About Others' Behavior
However, just ten minutes of communication increased the cooperation rate (to almost seventy percent) among players who were told that their contribution would benefit their ingroup. XW1hy, the expectation that others will cooperate increases the incidence of cooperative behavior in social dilemmas. One possibility is that the belief that others will cooperate increases the perception of ingroup membership.94 A second theory is that players in a social dilemma are much less motivated by the hope that they can gain at the expense of their fellow players than by the fear that their fellow human beings could successfully exploit them.
Another third possibility is that players look to others' behavior as a cue in a new and otherwise ambiguous social situation of what the appropriate behavioral norm is, and whether the context calls for primarily cooperative or competitive behavior. ".
The Influence of Economic Context
Studies have shown that while people participate in social dilemma games, when the personal costs associated with cooperation increase (that is, when players' expected gains from defections increase), the level of cooperation begins to decline. For example, Sally's regression analysis showed that doubling the reward for defection reduced average participation rates by as much as sixteen percentage points.” In other words, people's willingness to trust seems slightly “down.” As Personal Costs Trust in a Social Dilemma Increases, the Level of Cooperation Declines Experimental evidence suggests that it is precisely in such circumstances—when the individual costs of cooperation are relatively small and the benefits to others relatively large—that people are most likely to participate in a social dilemma.9 Thus, it appears, that trusting behavior is particularly likely to occur (and lead to clear social benefits) in situations in which the trusting behavior of a corporate participant would generate a disproportionate profit, or in which abuse by that participant would cause a disproportionate harm.
In such experiments, groups of players who cooperate with each other in the first rounds tend to continue to cooperate. finding that increasing players' costs of cooperation decreased cooperation rates in social dilemmas; id.
Caveats and Conclusions
TRUST BEHAVIOR AND CORPORATE LAW
The conventional nexus-of-contract approach to corporate law attempts to explain how businesses work, and the role of law in making them work, solely in terms of market incentives and legal obligations. But understanding the role of trust in business relationships and the variables that influence trust is also important for legislators, legal scholars and practicing lawyers. Below we look at how the behavioral phenomenon of trust can provide crucial insights into a variety of debates and puzzles in contemporary corporate law.
We begin by revisiting one of the longest-running conflicts in contemporary business scholarship: the battle between the “contractors” and the “countercontractors” over the nature of corporations' fiduciary duties.
Trust Behavior, the Duty of Loyalty, and the Contractarian-
Instead, we demonstrate how the phenomenon of trust behavior helps explain both the nature and the intensity of the anticontractarians' objections to the contractarian position. The recognition that fiduciary duties require other-regarding behavior reveals the core of the distinction between fiduciary relationships. A behavioral analysis of the fiduciary relationship accordingly supports the anticontractarian view that it is fundamentally misleading—even dangerous—to apply the rhetoric of contract to fiduciaries.
It seems unlikely that officers, directors and shareholders will be allowed to opt out of the fiduciary duties normally imposed.
Trust Behavior, the Duty of Care, and the BusinessJudgment Rule
By urging directors to inform themselves of all material information reasonably available, the court uses the language of negligence, which by implication tests directors' conduct to the standard of the "reasonable person." Yet in the next breath the court makes clear that no liability will be imposed unless the directors are grossly negligent - a much more lax standard of conduct.5 This bipolar aspect of corporate jurisprudence has been noted by a number of scholars, among others. Melvin Eisenberg, who has prominently argued that in corporate law in general - and in care of care cases in particular - "the standards of conduct and review diverge pervasively."5' The standard of conduct for directors (say courts) is that of the reasonably prudent person. 158 Such jurisprudence tempts one to ponder with Dean Clark about "whether the courts are serious when they say directors can be held liable for negligence." CLARK, supra note 13, at 126.
The boardroom is a notoriously opaque environment.7' Even in large companies, only the most public and bitter battles are reported in the press.
Trust Behavior, the Limits of Law, and the Case of the Closely Held
No matter how carefully they draw up the corporate charter, participants in closely linked companies remain mutually vulnerable. Finally, fiduciary duties provide a notoriously dangerous form of protection for minority shareholders in closely held corporations. This is because participants in closely held firms typically invest large amounts of firm-specific financial and human capital.
This pattern strongly suggests that family and social ties alone are insufficient to limit opportunism in close-knit firms.
