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Are non-binding contracts really not worth the paper?

  • Bernd Irlenbusch

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

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.

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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 27 (2006)
Issue (Month): 1 ()
Pages: 21-40

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Handle: RePEc:wly:mgtdec:v:27:y:2006:i:1:p:21-40
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