Do Non-Enforceable Contracts Matter? Evidence from an International Lab Experiment

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 nonenforceable 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. 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." JEL Codes: C91, D03

Are a culture of trust and morality associated with paying and repaying behavior?

“…At a general level the results concur with findings in the research of tax compliance and tax morale (McGee, 2012) and, especially with Torgler's (2003) finding that trust in public officials and legal systems has a positive influence on tax compliance. Our results are also compatible with the finding of Cappelen et al (2012) that moral considerations may explain paying behavior independently of the quality of the contract (being either enforcing nor non‐enforcing). The results are also in accordance with research findings which emphasize the role of empirical and normative expectations (Bicchieri and Xiao, 2009; Sugden, 2000; Gächter, 2007) when an individual decides to comply or not to comply with a norm: there is evidence that people comply if they expect that others will also comply, and that they do not comply if they think that others will not comply either (Sacconi and Faillo, 2010; Tammi, 2011).…”

“…Their analysis shows that national cultures are related to the use of deposits, life insurance and pension funds. From a totally different approach and more closely focusing on paying and repaying behavior, Cappelen et al (2012) modified the well‐known experimental economics trust game into a lending‐borrowing game. In this case trust is measured by observing in a controlled experiment how much of a certain sum of money a subject called the “sender” transfers to the other subject in the expectation that the latter will “repay” a portion of the doubled or tripled sum of money.…”

“…In this case trust is measured by observing in a controlled experiment how much of a certain sum of money a subject called the “sender” transfers to the other subject in the expectation that the latter will “repay” a portion of the doubled or tripled sum of money. Cappelen et al (2012) found that the content of the lending contract (be it enforceable or non‐enforceable) has no role in the repaying behavior of the borrowers in the game. Instead, the researchers suggest that moral motives related to reciprocity, social preferences and needs considerations are more important.…”

Poverty, Development, and Behavioral Economics

“…The fourth paper in the Special Issue, “Do Non‐Enforceable Contracts Matter? Evidence from an International Lab Experiment,” by Alexander W. Cappelen, Rune J. Hagen, Erik Ø. Sorensen, and Bertil Tungodden, explores the question through a version of the trust game involving loan repayments, played with participants in Norway and in Tanzania (Cappelen et al ., ). The presence of subjects from two countries with extremely different income levels offers an interesting opportunity to examine differences in, for example, the extent of maintaining non‐binding obligations.…”