The Contract State, Trust Distortion, and Efficiency

In this paper we challenge the Public Choice-Agency Theory approach, which characterizes economic transactions as a series of discrete, unique events. We argue that the policy implications flowing from this view of the world are flawed, as they ignore the role of trust in contract formation and execution. Evidence is drawn from health, local authority, and water service sectors of the economy to illustrate the way in which the efficiency-enhancing properties of contract-based provision may be attenuated if trust is distorted by institutional change.