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

Alexander Wright Cappelen, Rune Jansen Hagen, Erik Øiolf Sørensen and Bertil Tungodden

Review of Income and Wealth

Photo: Review of Income and Wealth

Published in:

The Review of Income and Wealth 2014 60 (1) pp. 100-113.

DOI:10.1111/roiw.12099

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 contribute 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.”

 

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Published May 4, 2015 3:37 PM - Last modified May 4, 2015 3:37 PM