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DO NON-ENFORCEABLE CONTRACTS MATTER? EVIDENCE FROM AN INTERNATIONAL LAB EXPERIMENT Department

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Author Info

  • Cappelen, Alexander W.

    ()
    (Department of Economics, Norges Handelshøyskole)

  • Hagen, Rune Jansen

    ()
    (Department of Economics, University of Bergen)

  • Sørensen, Erik Ø.

    ()
    (Department of Economics, Norges Handelshøyskole)

  • Tungodden, Bertil

    ()
    (department of Economics, Norges handelshøyskole)

Abstract

Many verifiable contracts are impossible or difficult to enforce. This applies to contracts among family and friends, contracts regulating market transactions, and sovereign debt contracts. Do such non-enforceable contracts matter? We use a version of the trust game with participants from Norway and Tanzania to study repayment decisions in the presence of non-enforceable loan contracts. Our main finding is that the specific content of the contract has no effect on loan repayment. Rather, the borrowers seem to be motivated by other moral motives, which contributes to explaining why they partly fulfill non-enforceable contracts. We also show that some borrowers violate the axiom of first-order stochastic dominance when rejecting loan offers, partly which may reflect negative reciprocity, but also seems to reflect a fundamental aversion against uncertainty.

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Bibliographic Info

Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 16/12.

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Length: 26 pages
Date of creation: 06 Nov 2012
Date of revision:
Handle: RePEc:hhs:bergec:2012_016

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Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
Phone: (+47)55589200
Fax: (+47)55589210
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Web page: http://www.uib.no/econ/en
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Related research

Keywords: Economic experiments; trust game; contract enforcement;

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References

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  1. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
  2. Eckel, Catherine C. & Grossman, Philip J., 1996. "Altruism in Anonymous Dictator Games," Games and Economic Behavior, Elsevier, vol. 16(2), pages 181-191, October.
  3. Ernst Fehr & Oliver Hart & Christian Zehnder, 2009. "Contracts, Reference Points, and Competition-Behavioral Effects of The Fundamental Transformation," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 561-572, 04-05.
  4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March.
  5. Ernst Fehr & Oliver D. Hart & Christian Zehnder, 2011. "How Do Informal Agreements and Renegotiation Shape Contractual Reference Points?," NBER Working Papers 17545, National Bureau of Economic Research, Inc.
  6. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
  7. Cox, James C. & Friedman, Daniel & Gjerstad, Steven, 2007. "A tractable model of reciprocity and fairness," Games and Economic Behavior, Elsevier, vol. 59(1), pages 17-45, April.
  8. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer, vol. 9(3), pages 193-208, September.
  9. Uri Gneezy & John A List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect Is Valued Less Than Its Worst Possible Outcome," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1283-1309, November.
  10. Avner Ben-Ner & Louis Putterman, . "Trust, Communication and Contracts: An Experiment," Working Papers 0206, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  11. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  12. Charness, Gary B, 2004. "Attribution And Reciprocity In An Experimental Labor Market," University of California at Santa Barbara, Economics Working Paper Series qt8rp6b18c, Department of Economics, UC Santa Barbara.
  13. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  14. Alexander W. Cappelen & Astri Drange Hole & Erik Ø Sørensen & Bertil Tungodden, 2007. "The Pluralism of Fairness Ideals: An Experimental Approach," American Economic Review, American Economic Association, vol. 97(3), pages 818-827, June.
  15. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02.
  16. Al-Samarrai, Samer & Bennell, Paul, 2006. "Where has all the education gone in Sub-Saharan Africa? Employment and other outcomes among secondary school and university leavers," MPRA Paper 128, University Library of Munich, Germany.
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