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

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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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
Contact details of provider: Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
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  1. Samer Al-Samarrai & Paul Bennell, 2007. "Where has all the education gone in sub-Saharan Africa? employment and other outcomes among secondary school and university leavers," Journal of Development Studies, Taylor & Francis Journals, vol. 43(7), pages 1270-1300.
  2. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  3. Fehr, Ernst & Hart, Oliver & Zehnder, Christian, 2008. "Contracts as Reference Points: Experimental Evidence," IZA Discussion Papers 3889, Institute for the Study of Labor (IZA).
  4. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02.
  5. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "How do informal agreements and renegotiation shape contractual reference points?," ECON - Working Papers 043, Department of Economics - University of Zurich.
  6. James C. Cox & Daniel Friedman & Steven Gjerstad, 2006. "A Tractable Model of Reciprocity and Fairness," Experimental Economics Center Working Paper Series 2006-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  7. Alexander W. Cappelen & Bertil Tungodden, 2002. "Responsibility and Reward," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 120-, February.
  8. 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.
  9. 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.
  10. 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.
  11. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers 040, Institute for Empirical Research in Economics - University of Zurich.
  12. Nava Ashraf & Iris Bohnet & Nikita Piankov, 2006. "Decomposing trust and trustworthiness," Experimental Economics, Springer, vol. 9(3), pages 193-208, September.
  13. 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.
  14. 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.
  15. 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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