More Order with Less Law: On Contract Enforcement, Trust and Crowding

44 Pages Posted: 19 Jul 2000

See all articles by Iris Bohnet

Iris Bohnet

Harvard University - Harvard Kennedy School (HKS)

Bruno S. Frey

CREMA; University of Basel

Steffen Huck

University College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Date Written: July 7, 2000

Abstract

Most contracts, whether between voters and politicians or between house owners and contractors, are incomplete. "More law", it typically is assumed, increases the likelihood of contract performance by increasing the probability of enforcement and/or the cost of breach. This paper studies a contractual relationship where the first mover has to decide whether she wants to enter a contract without knowing whether the second mover will perform. We analyze how contract enforceability affects individual performance for exogenous preferences. Then we apply a dynamic model of preference adaptation and find that economic incentives have a non-monotonic impact on behavior. Individuals perform a contract when enforcement is strong or weak but not with medium enforcement probabilities. Trustworthiness is "crowded in" with weak and "crowded out" with medium enforcement. In a laboratory experiment we test our model's implications and find support for the crowding prediction. Our finding is in line with the recent work on the role of contract enforcement and trust in formerly Communist countries.

JEL Classification: C73, C91, K42, L14

Suggested Citation

Bohnet, Iris and Frey, Bruno S. and Huck, Steffen, More Order with Less Law: On Contract Enforcement, Trust and Crowding (July 7, 2000). Available at SSRN: https://ssrn.com/abstract=236476 or http://dx.doi.org/10.2139/ssrn.236476

Iris Bohnet (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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Bruno S. Frey

CREMA ( email )

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Switzerland
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University of Basel ( email )

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Steffen Huck

University College London - Department of Economics ( email )

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United Kingdom
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HOME PAGE: http://www.ucl.ac.uk/~uctpshu/

CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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