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Information and the persistence of private-order contract enforcement institutions: An experimental analysis

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  • Wilkening, Tom

Abstract

We study an experimental market in which some sellers are prone to moral hazard, and in which a private-order contract enforcement institution exists that can mediate trade and prevent sellers from reneging on their contractual obligations. Using the institution to resolve the moral-hazard problem is costly. We demonstrate that in this market, the utilization of the private-order contract enforcement institution may make public and private market signals uninformative and inhibit learning. We study whether this potential information externality can limit adaptation away from the private-order institution when it is efficient to do so. Consistent with theory, we find inefficient persistence when the institution is used, but by contrast, efficient adaptation in other situations. Providing information to individuals who are using the private-order institution allows them to partially adapt.

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  • Wilkening, Tom, 2016. "Information and the persistence of private-order contract enforcement institutions: An experimental analysis," European Economic Review, Elsevier, vol. 89(C), pages 193-215.
    • Handle: RePEc:eee:eecrev:v:89:y:2016:i:c:p:193-215
    DOI: 10.1016/j.euroecorev.2016.07.004
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    2. Kamm, Aaron & Koch, Christian & Nikiforakis, Nikos, 2021. "The ghost of institutions past: History as an obstacle to fighting tax evasion?," European Economic Review, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Persistence of institutions; Equilibrium selection; Information; Experimental economics;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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