Are non-binding contracts really not worth the paper?

✍ Scribed by Bernd Irlenbusch

• Publisher: John Wiley and Sons
• Year: 2005
• Tongue: English
• Weight: 266 KB
• Volume: 27
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/mde.1243

✦ Synopsis

Abstract

We experimentally investigate behavior in sequential one‐shot transactions which are governed by non‐binding contracts. In a second, incomplete information treatment, contracts are binding for some players. While according to traditional game‐theoretical analysis no trade is expected in the first treatment, full trade should result in the latter. However, we find that trade is even higher in the non‐binding contract treatment. On the one hand, non‐binding contracts—although they are cheap talk—do guide behavior, especially at the beginning of a business relationship, while reciprocal reactions prevail later on. On the other hand, in the treatment with binding contracts cooperative behavior appears to be crowded out. Copyright © 2005 John Wiley & Sons, Ltd.