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). KSG Working Paper No. 00-009. 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 )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-5605 (Phone)
617-496-5747 (Fax)

Bruno S. Frey

CREMA ( email )

Südstrasse 11
Zurich, CH 8008
Switzerland
+41 44 380 00 78 (Phone)

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

Steffen Huck

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 207 679 5895 (Phone)
+44 207 916 2774 (Fax)

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

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
663
Abstract Views
3,377
rank
38,799
PlumX Metrics