Information and the persistence of private-order contract enforcement institutions: An experimental analysis

Tom Wilkening

European Economic Review, 2016, vol. 89, issue C, 193-215

Abstract: We study an experimental market in which some sellers are prone to moral hazard, and in which a private-order contract enforcement institution exists that can mediate trade and prevent sellers from reneging on their contractual obligations. Using the institution to resolve the moral-hazard problem is costly. We demonstrate that in this market, the utilization of the private-order contract enforcement institution may make public and private market signals uninformative and inhibit learning. We study whether this potential information externality can limit adaptation away from the private-order institution when it is efficient to do so. Consistent with theory, we find inefficient persistence when the institution is used, but by contrast, efficient adaptation in other situations. Providing information to individuals who are using the private-order institution allows them to partially adapt.

Keywords: Persistence of institutions; Equilibrium selection; Information; Experimental economics (search for similar items in EconPapers)
JEL-codes: C92 D02 D40 D82 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:89:y:2016:i:c:p:193-215

DOI: 10.1016/j.euroecorev.2016.07.004

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