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Do Non‐Enforceable Contracts Matter? Evidence from an International Lab Experiment
Author(s) -
Cappelen Alexander W.,
Hagen Rune Jansen,
Sørensen Erik Ø.,
Tungodden Bertil
Publication year - 2014
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12099
Subject(s) - loan , economics , reciprocity (cultural anthropology) , incomplete contracts , debt , preference , order (exchange) , microeconomics , law and economics , finance , incentive , psychology , social psychology
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 N orway and T anzania 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. This seems partly to be due to negative reciprocity, but may also reflect that there are individuals who have a preference for not accepting something referred to as a “loan.”