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• Irlenbusch, B. (2006). 'Are non-binding contracts really not worth the paper?'. Managerial and Decision Economics 27(1): 21-40.

http://dx.doi.org/10.1002/mde.1243

• • We experimentally investigate behavior in sequential one-shot transactions which are governed by non-binding contracts. In a second, incomplete information treatment, contracts are binding for some players. While according to traditional game-theoretical analysis no trade is expected in the first treatment, full trade should result in the latter. However, we find that trade is even higher in the non-binding contract treatment. On the one hand, non-binding contracts - although they are cheap talk - do guide behavior, especially at the beginning of a business relationship, while reciprocal reactions prevail later on. On the other hand, in the treatment with binding contracts cooperative behavior appears to be crowded out.