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

Alexander Cappelen, Rune Hagen, Erik Sørensen and Bertil Tungodden

No 16/12, Working Papers in Economics from University of Bergen, Department of Economics

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.

Keywords: Economic experiments; trust game; contract enforcement (search for similar items in EconPapers)
JEL-codes: C91 D03 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-11-06
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