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Do non-enforceable contracts matter? Evidence from an international lab experiment

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Author Info

  • Cappelen, Alexander W.

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Hagen, Rune Jansen

    ()
    (University of Bergen)

  • Sørensen, Erik Ø.

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Tungodden, Bertil

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

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, which partly may reflect negative reciprocity, but also seems to reflect a fundame tal aversion against uncertainty.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian School of Economics in its series Discussion Paper Series in Economics with number 2/2012.

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Length: 20 pages
Date of creation: 12 Feb 2012
Date of revision: 03 Apr 2012
Handle: RePEc:hhs:nhheco:2012_002

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Keywords: Non-enforceable contracts; Lab experiment.;

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  1. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer, vol. 9(3), pages 193-208, September.
  2. Uri Gneezy & John List & George Wu, 2006. "The uncertainty effect: When a risky prospect is valued less than its worst possible outcome," Framed Field Experiments 00152, The Field Experiments Website.
  3. Cox, J. & Friedman, D. & Gjerstad, S., 2006. "A Trackable Model of Reciprocity and Fairness," Purdue University Economics Working Papers 1181, Purdue University, Department of Economics.
  4. Alexander W. Cappelen & Bertil Tungodden, 2002. "Responsibility and Reward," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 120-, February.
  5. Eckel, Catherine C. & Grossman, Philip J., 1996. "Altruism in Anonymous Dictator Games," Games and Economic Behavior, Elsevier, vol. 16(2), pages 181-191, October.
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  7. 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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  9. 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.
  10. Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2011. "How Do Informal Agreements and Renegotiation Shape Contractual Reference Points?," IZA Discussion Papers 6095, Institute for the Study of Labor (IZA).
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  12. Oliver Hart & John Moore, 2006. "Contracts as Reference Points," NBER Working Papers 12706, National Bureau of Economic Research, Inc.
  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. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers 040, Institute for Empirical Research in Economics - University of Zurich.
  15. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
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