We develop a model of financial contracting under imperfect enforcement. Financial contracts are ... more We develop a model of financial contracting under imperfect enforcement. Financial contracts are designed to keep entrepreneurs from diverting project returns, but enforcement is probabilistic and penalties are limited. The model rationalizes the prevalence of straight debt and common stock, and its predictions are consistent with a host of empirical capital structure regularities. JEL Codes: G32. * We thank Ulf Axelsson, Mike Burkart, Bengt Holmström, Andrei Shleifer, Jean Tirole, and three anonymous referees for their helpful comments. Financial support from the Torsten and Ragnar Söderberg Foundation (Tore Ellingsen) and The Finance Market Fund (Eirik Gaard Kristiansen) is gratefully acknowledged. 1. As discussed by Shleifer and Vishny (1997), diversion takes many different forms. For specific examples, see Johnson et al. (1998) and Atanasov et al. (2010). 2. See Daughety and Reinganum (2000); Bull and Watson (2004); MacLeod (2007); and Kvaløy and Olsen (2009) for discussions of probabilistic enforcement of claims in courts.
In a laboratory experiment, we create relationships between pairs of anonymous subjects through a... more In a laboratory experiment, we create relationships between pairs of anonymous subjects through a Prisoners' dilemma game. Thereafter the same subjects play a private values (sealed-bid double auction) bargaining game with or without communication. Communication substantially increases bargaining efficiency among subjects who cooperated in the Prisoners' dilemma, but has no significant effect on bargaining outcomes when one subject defected. Subjects who cooperated in the Prisoners' dilemma bid more aggressively if their opponent defected. Cooperators also lie more about their valuations when their opponent defected: Compared to the case of mutual cooperation, the cooperators' rate of honest revelation decreases from 64% to 6% and the rate of outright deception increases from 7% to 53%. Our results provide qualitatively new evidence that many people are strong reciprocators: They are willing to bear private costs in order to reward good behavior and punish bad behavior, even when the rewards and punishments are unobservable.
Baron argues that infrequent punishments are more cost efficient than infrequent rewards. But our... more Baron argues that infrequent punishments are more cost efficient than infrequent rewards. But our experiment does not represent a situation of intermittent rewarding. Instead, we have shown that contributions to the public good can be maintained by linking the public goods ...
Guilt averse individuals experience a utility loss if they believe they let someone down. In part... more Guilt averse individuals experience a utility loss if they believe they let someone down. In particular, generosity depends on what the donor believes that the recipient expects to receive. In experimental work, several authors have identified a positive correlation between such second-order donor beliefs and generous behavior, as predicted by the guilt aversion hypothesis. However, the correlation could alternatively be due to a "false consensus effect," i.e., the tendency of people to believe others to think like themselves. In order to test the guilt aversion hypothesis more rigorously, we conduct three separate experiments: a dictator game experiment, a complete information trust game experiment, and a hidden action trust game experiment. In the experiments we inform donors about the beliefs of their respective recipients, while eliciting these beliefs so as to maximize recipient honesty. The correlation between generous behavior and donors' second-order beliefs is close to zero in all three experiments.
We estimate the distribution of exit reservation prices in a dictator game. The mean exit reserva... more We estimate the distribution of exit reservation prices in a dictator game. The mean exit reservation price equals 82% of the dictator game endowment and only 36% of subjects have exit reservation prices consistent with selfish or social preferences.
The Policy Research Working Paper Series disseminates the findings of work in progress to encoura... more The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
∗ Department of Economics, Stockholm School of Economics, Box 6501, SE113 83 Stockholm, Sweden. ... more ∗ Department of Economics, Stockholm School of Economics, Box 6501, SE113 83 Stockholm, Sweden. Email: tore.ellingsen@hhs.se. ∗∗ Department of Economics, Stockholm School of Economics, Box 6501, SE113 83 Stockholm, Sweden. Email: richard.friberg@ ...
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