RECIPROCITY AS A CONTRACT ENFORCEMENT DEVICE - EXPERIMENTAL-EVIDENCE

Numerous experimental studies indicate that people tend to reciprocate favors and punish unfair behavior. It is hypothesized that these beha vioral 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 reci procity on contract enforcement depends on the details of the pecuniar y 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 th e set of enforceable actions and, hence, large efficiency gains.