Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 16/12: DO NON-ENFORCEABLE CONTRACTS MATTER? EVIDENCE FROM AN INTERNATIONAL LAB EXPERIMENT Department

Alexander W. Cappelen (), Rune Jansen Hagen (), Erik Ø. Sørensen () and Bertil Tungodden ()
Additional contact information
Alexander W. Cappelen: Department of Economics, Norges Handelshøyskole, Postal: NHH, Helleveien 30, NO-5045 Bergen, Norway
Rune Jansen Hagen: Department of Economics, University of Bergen, Postal: Department of economics, fosswinckelsgate 14. NO-5020 bergen, Norway
Erik Ø. Sørensen: Department of Economics, Norges Handelshøyskole, Postal: NHH, Helleveien 30, NO-5045 Bergen, Norway
Bertil Tungodden: department of Economics, Norges handelshøyskole, Postal: NHH, Helleveien 30, NO-5045 Bergen, Norway

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

JEL-codes: C91; D03

26 pages, November 6, 2012

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