Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 2/2012: Do non-enforceable contracts matter? Evidence from an international lab experiment.

Alexander W. Cappelen (), Rune Jansen Hagen (), Erik Ø. Sørensen () and Bertil Tungodden ()
Additional contact information
Alexander W. Cappelen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: Department of Economics, Norwegian School of Economics, Helleveien 30, NO-5045 Bergen, Norway
Rune Jansen Hagen: University of Bergen, Postal: Department of Economics, University of Bergen, NO-5020 Bergen, Norway
Erik Ø. Sørensen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Bertil Tungodden: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-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, which partly may reflect negative reciprocity, but also seems to reflect a fundame tal aversion against uncertainty.

Keywords: Non-enforceable contracts; Lab experiment.

JEL-codes: C91; D63; D80; F34

20 pages, First version: February 12, 2012. Revised: April 3, 2012.

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