Chapter 37 Reciprocity and Contract Enforcement

This chapter reports the results of experiments that were designed to test the effectiveness of reciprocity as a contract enforcement device. It turns out that reciprocity generates a significant increase in effort levels relative to the prediction based on selfish preferences. Moreover, it gives rise to a considerable mitigation of the contract enforcement problem. The impact of reciprocity is particularly strong if both parties have possibilities to reciprocate. Hence, reciprocity can lead to considerable efficiency gains for the contracting parties. These results indicate that models that neglect reciprocity are likely to make wrong predictions and are, thus, seriously incomplete as a basis for normative advice.