Trust, Incomplete Contracts and the Market for Technology

Melbourne Institute Working Paper No. 03/13

Date: February 2013


Paul H. Jensen
Alfons Palangkaraya
Elizabeth Webster


Conditional on the decision to enter the market for immature technology, we test for the effects that trust – as proxied by the context in which the negotiating parties met – has on the likelihood that these negotiations are successful. Using a randomised dataset of 860 university-firm and firm-firm technology transactions, we find that the depth of prior relationship and circumstantial knowledge about each other matters, and matters a lot. Parties who knew each other from a previous business are 28.2 percentage points more likely to conclude a transaction compared with cold-callers. Meeting via an industry network offers an intermediate advantage but meeting via a third party or at a conference only offers a modest advantage over cold calling.

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