Reciprocity as a Contract Enforcement Device: Experimental Evidence

Abstract

Numerous experimental studies indicate that people tend to reciprocate favors and punish unfair behavior. It is hypothesized that these behavioral responses contribute to the enforcement of contracts and, hence, increase gains from trade. It turns out that if only one side of the market has opportunities for reciprocal responses, the impact of reciprocity on contract enforcement depends on the details of the pecuniary incentive system. If both sides of the market have opportunities for reciprocal responses, robust and powerful reciprocity effects occur. In particular, reciprocal behavior causes a substantial increase in the set of enforceable actions and, hence, large efficiency gains.