It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains why trade credit has short maturity, why trade credit is more prevalent in less developed credit markets, and why accounts payable of large unrated firms are more countercyclical than those of small firms.

The public goods game is the classic laboratory paradigm for studying collective action problems. Each participant chooses how much to contribute to a common pool which returns benefits to all participants equally. The ideal outcome is if everybody contributes the maximum amount, but the self-interested strategy is not to contribute anything. Most previous studies have found punishment to be more effective than reward for maintaining cooperation in public goods games. The typical design of these studies, however, represses future consequences for today’s actions. In an experimental setting, we compare public goods games followed by punishment, reward or both in the setting of truly repeated games, where player identities persist from round to round. We show that reward is as effective as punishment for maintaining public cooperation and leads to higher total earnings. Moreover, when both options are available, reward leads to increased contributions and payoff, while punishment has no effect on contributions and leads to lower payoff. We conclude that reward outperforms punishment in repeated public goods games and that human cooperation in such repeated settings is best supported by positive interactions with others.

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Many people are sensitive to social esteem, and their pride is a source of pro-social behavior. We present a game-theoretic model in which sensitivity to esteem varies across players and may depend on context as well players' beliefs about their opponents. For example, the pride associated with a generous image is greater when the player holding the image is in fact generous and believes the observers to be generous as well. The model can account both for the fact that players' behavior sometimes depends on the opponents' unchosen options and for the prevalence of small symbolic gifts. Perhaps most importantly, the model offers an explanation for motivational crowding out: Control systems and pecuniary incentives may erode morale by signaling to the agent that the principal is not worth impressing. We are grateful to the Torsten and Ragnar Söderberg Foundation (Ellingsen) and the Swedish Research Council (Johannesson) for financial support. Thanks to George Baker, Kjell-Arne Brekke, Florian Englmaier, Ernst Fehr, Martin Flodén, Oliver Hart, Bengt Holmström, John Moore, Anna Sjögren, Jean-Robert Tyran, RobertÖstling, and especially Michael Kosfeld for helpful discussions. The paper has also benefited from comments by many other seminar and conference participants. Errors are ours.

We present experimental evidence that promises and threats mitigate the hold-up problem. While investors rely as much on their own threats as on their trading partner's promises, the latter are more credible. Building on recent work in psychology and behavioural economics, we then present a simple model within which agents are concerned about both fairness and consistency. The model can account for several of our experimental findings. Its most striking implication is that fairmindedness strengthens the credibility of promises to behave fairly, but weakens the credibility of threats to punish unfair behaviour.