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Are non-binding contracts really not worth the paper?

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  • Bernd Irlenbusch

    (London School of Economics, Houghton Street, London WC2A 2AE, UK)

Abstract

We experimentally investigate behavior in sequential one-shot transactions which are governed by non-binding contracts. In a second, incomplete information treatment, contracts are binding for some players. While according to traditional game-theoretical analysis no trade is expected in the first treatment, full trade should result in the latter. However, we find that trade is even higher in the non-binding contract treatment. On the one hand, non-binding contracts-although they are cheap talk-do guide behavior, especially at the beginning of a business relationship, while reciprocal reactions prevail later on. On the other hand, in the treatment with binding contracts cooperative behavior appears to be crowded out. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Bernd Irlenbusch, 2006. "Are non-binding contracts really not worth the paper?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 21-40.
    • Handle: RePEc:wly:mgtdec:v:27:y:2006:i:1:p:21-40
    DOI: 10.1002/mde.1243
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