Promises, Reliance and Psychological Lock-In
Rebecca Stone&
Alexander StremitzerIMPRS Jena, July 28
Legal Enforcement of Promises
• Conventional account: Legal system enforces promises because otherwise…– promisors would opportunistically break promises.– Anticipating this promisees would under-rely.
• Treating this under-investment result as a benchmark, the question then becomes which remedy leads to better investment incentives (Shavell 1980, 1984; Rogerson 1990; Edlin & Reichelstein 1994, ...).– Typically, the legal regime runs the risk of leading to
overinvestment.
Legal Enforcement of Promises
• Legal enforcement facilitates exchange and production by allowing people to commit to a future course of action.
Alternative Sources of Commitment
• Reputational concerns - literature on relational contracting (Macaulay 1963, Klein & Leffler 1981, Baker, Gibbons & Murphy 1994, Levin 2003, ...)– Allows promisors to commit to a future action in
repeated interactions (but not in a one-shot interaction.)
Alternative Sources of Commitment
• Moral force of promise keeping (Ellingsen & Johannesson 2004, Charness & Dufwenberg 2006, Vanberg 2008, Ederer & Stremitzer 2015...)– Classic Game Theory: Mere cheap talk. No
commitment, no reliance investments.– Guilt Aversion: Creates commitment power,
positive investment incentives in the absence of legal enforcement (also in one-shot interaction.)
Promissory Lock-in
• If reliance affects a promisor’s guilt from breaking his promise, we would predict that– Promisors more inclined to keep promises that
have been relied upon.• If promisees anticipate this, we would predict
that– Promisees overinvest in order to encourage
promisors to keep their promises (“psychological lock-in”)?
Effect of the Legal Regime
• Legal enforcement might therefore– Reduce overinvestment as promisees no longer
have to rely on the extra-legal mechanism of locking in the promisor (by overinvesting).
– But, might also reduce cooperation when the legal regime is not triggered (crowding out).
Legal Regime
• We study legal enforcement that resembles a promissory estoppel regime. – Enforcement of promises that have been
detrimentally relied upon.– Discretion between ED and RD.– In this paper, we focus on ED.
Player A
Don’t Send MoneySend Money
A gets 12B gets 12
A gets 15B gets 6
Design The Modified Dictator Game
Player B
Player A
B’s investment = i
Don’t Send MoneySend Money
A gets 12B gets 12 if i = 0 12.50 – 0.25i if i > 0
A gets 15B gets 6 – i
0 1 2 3 4 5 6
Design The Modified Dictator Game
Design
• Treatments:– No Regime: No enforcement; subjects can make
promises to one another.– Expectation Damages: A has to compensate B if
she breaks a promise upon which B relied by paying B Expectation Damages.
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
Yes No
Payoffs under No Regime
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
Yes No
Payoffs under No Regime
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 6
1 7.75 12.25
2 7 12
3 6.25 11.75
4 5.50 11.50
5 4.75 11.25
6 4 11
Yes No
Payoffs under Expectation Damages
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 12
1 7.75 12.25
2 7 12
3 6.25 11.75
4 5.50 11.50
5 4.75 11.25
6 4 11
Yes No
Payoffs under Expectation Damages
Strategy Method and Belief Elicitation
• We used the strategy method for A’s choice:– A had to indicate whether or not she would send
money to B for every possible investment level;– A’s actual choice (and so final payoffs) was
determined by the choice she made for the investment level actually chosen by B.
• We also elicited B’s beliefs about A’s actions:– Prior to making his investment decision, B had to
indicate his level of confidence that A would send him money for each possible investment level.
Procedure
• Experiments were conducted at Xlab (Berkeley) and EBEL (UCSB).
• Between-subject design: each subject participates in only one treatment.
• 70 subjects per treatment.• In each treatment:
– Subjects play 8 rounds of the experiment (after 2 practice rounds).
– Each subject is randomly matched with a new subject at the beginning of each round.
Procedure• Earnings:
– One round was randomly selected for payment based on the subjects actions in this round.
• Average earnings = $11.55 – A different round was randomly selected for
payment based on B’s guesses about A’s actions• Average earnings = $2.19
– Subjects also earned a $5 show-up fee and payment for some post-experiment questions.
Results: Positive Cooperation in Absence of Legal Regime
• Dictators cooperate 40% of the time in No Regime.
• Average investment is 1.04 in No Regime. • Contrary to the predictions of Classic Game
Theory
ED generates superior investment decisions than No RegimeNOTE: less overinvestment
Results: Investment Decisions
0.2
.4.6
0 1 >1 0 1 >1
0 ED
Freq
uenc
y
InvestmentGraphs by regime
Results: Average Overinvestment
ED generates lower average overinvestment than No Regime: 2.3 versus 3.3.
12
34
No Regime ED
Average Overinvestment
Results: Psychological Lock-In
0.5
11.
52
2.5
Fitte
d va
lues
0 1 2 3 4 5 6Hypothetical Investment
Recipient's Beliefs
0.1
.2.3
.4.5
Fitte
d va
lues
0 1 2 3 4 5 6Hypothetical Investment
Dictator's Cooperation
Dictators cooperate more as investment increases and Recipients anticipate this
Results: Cooperation
ED generates more cooperation than No Regime.
0.2
5.5
.75
Frac
tion
0 ED
Cooperation Rates
0.2
5.5
.75
1
0 ED
Promise
0.2
5.5
.75
1
0 ED
No Promise
Cooperation Across Regimes
Results: Promises Made
Introducing a Legal Regime reduces the numbers of promises
0.2
.4.6
.8Fr
actio
n of
Pro
mis
es
No Regime ED
Promises Made
Crowding Out
The legal regime crowds out cooperation when a promise is made and investment is zero.
0.2
.4.6
.81
0 1 2 3 4 5 6Hypothetical Investment
No Regime ED
Aggregate
0.2
.4.6
.81
0 1 2 3 4 5 6Hypothetical Investment
No Regime ED
Promise
Cooperation Profile
Crowding Out
Recipients anticipate this crowding out
01
23
4
0 1 2 3 4 5 6Hypothetical Investment
No Regime ED
Aggregate
01
23
40 1 2 3 4 5 6
Hypothetical Investment
No Regime ED
Promise
Belief Profile
Results: Joint Payoffs
Legal Regime with ED generates higher joint payoffs.
1819
2021
2223
2425
0 ED
Aggregate
1819
2021
2223
2425
0 ED
Promise
1819
2021
2223
2425
0 ED
No Promise
Joint Payoff Across Regimes
Results: Payoff Differentials
Legal Regime ED generates the lowest payoff differentials between participants
01
23
45
67
89
10
No Regime ED
Aggregate
01
23
45
67
89
10
No Regime ED
Promise
01
23
45
67
89
10
No Regime ED
No Promise
Payoff Differential Across Regimes
Conclusions
• Absent Legal Enforcement:– Promisors are more inclined to keep promises that
have been relied upon.– Promisees anticipate this effect:
• Beliefs: Positive relationship between reliance and cooperation.
• Actions: Overinvestment.– Consistent with “psychological lock-in”.
Conclusions
• Introducing the Legal Regime– ED generates superior investment decisions.
• Surprisingly, reduces overinvestment – ED improves overall cooperation rates.– Downside: ED crowds out voluntary cooperation
when legal regime is not triggered.• However, since Recipients anticipate this, it doesn’t have
a large effect on aggregate welfare.
Implications
• Reliance matters for promise keeping.• To the extent that law tracks our moral
intuitions, reliance should be legally relevant in deciding whether to enforce.
• Legal regimes may crowd out (inefficient) extra-legal enforcement mechanisms.
• Crowding out extra-legal mechanism is not necessarily a bad thing: ED gives promisees a more fine-tuned tool to lock in the promisor.
Appendix
A will
certainly send B money
A will
probably send B money
There is a
50-50 chance that A
sends B money
A
probably will not send B money
A certainly
will not send B money
B’s earnings if A decides to send him money
$0.65
$0.60
$0.50
$0.35
$0.15
B’s earnings if A decides not send B money
$0.15
$0.35
$0.50
$0.60
$0.65
Elicitation of B’s Beliefs
Participant 1
Participant 2 Participant 2
“I promise to send $ if you promise me back”
“I don’t promise”
“I don’t promise”“I promise” “I promise”
Both 1 & 2 have
promised
Neither 1 nor 2 have promised
Neither 1 nor 2 have promised
Only 2 has promised
Design: The Communication Phase
Freeform Design
• Alternative Design: – subjects to freely communicate during the
Communication Phase;– a panel of three other subjects evaluate the
conversations to determine whether promises were made.
• Problem: subjects coordinate on the investment decision, so any lock-in effect seems to disappear.
• [Question: We see less overinvestment under RD—remedies less relevant when trust develops?]
Promise-Making Over Time
.4.5
.6.7
.8.9
1P
rom
ise
Rat
e
1 2 3 4 5 6 7 8Period
No Regime EDRD
Promise-Making
Investment Over Time
0.5
11.
52
2.5
Mea
n In
vest
men
t
1 2 3 4 5 6 7 8Period
Control No RegimeED RD
Aggregate Investment over Time
Investment Over Time
0.5
11.
52
2.5
33.
5In
vest
men
t
1 2 3 4 5 6 7 8Period
No Regime EDRD
Promise
0.5
11.
52
2.5
33.
5In
vest
men
t
1 2 3 4 5 6 7 8Period
No Regime EDRD
No Promise
Dynamcis of Investment
Cooperation Over Time
0.2
.4.6
.81
Coo
pera
tion
Rat
e
1 2 3 4 5 6 7 8Period
Control No RegimeED RD
Aggregate Cooperation Over Time
Cooperation Over Time
0.2
.4.6
.81
Coo
pera
tion
Rat
e
1 2 3 4 5 6 7 8Period
No Regime EDRD
Promise
0.2
.4.6
.81
Coo
pera
tion
Rat
e
1 2 3 4 5 6 7 8Period
No Regime EDRD
No Promise
Dynamics of Cooperation
Joint Payoffs Over Time
2021
2223
24Jo
int P
ayof
f
1 2 3 4 5 6 7 8Period
No Regime EDRD
Dynamics of Joint Payoffs
Joint Payoffs Over Time
2021
2223
2425
Join
t Pay
off
1 2 3 4 5 6 7 8Period
No Regime EDRD
Promise
2021
2223
2425
Join
t Pay
off
1 2 3 4 5 6 7 8Period
No Regime EDRD
No Promise
Joint Payoffs Over Time
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 6
1 14 6
2 13 6
3 12 6
4 11 6
5 10 6
6 9 6
Yes No
Payoffs under Reliance Damages
Did A send money to B?
A B
0 12 12
1 12 12.25
2 12 12
3 12 11.75
4 12 11.50
5 12 11.25
6 12 11
Did A make a promise?
A B
0 15 6
1 15 5
2 15 4
3 15 3
4 15 2
5 15 1
6 15 0
A B
0 15 6
1 14 6
2 13 6
3 12 6
4 11 6
5 10 6
6 9 6
Yes No
Payoffs under Reliance Damages
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