Trust, Reciprocity, and Contract Enforcement: Experiments on Satisfaction Guaranteed

Theorists and policy analysts have convincingly argued that greater trust makes a more e¢cient society by reducing the need for costly contracts. At the same time, some experiments have suggested that reciprocity is a potent substitute for law when compliance with contracts is imperfectly enforced. This paper examines these issues within the context of a common trust-building contract device: satisfaction guaranteed. We ...nd that this mechanism does indeed build trust and improve e¢ciency, but only if it is externally enforced. Paradoxically, only one side of the transaction needs the assurance of external enforcement. O¤ering a satisfaction guarantee always increases trustworthiness of sellers, even when honoring it is fully voluntary, but only elicits the trust of buyers when it is legally enforced. ¤I am grateful to Nava Ashraf, Robert Frank, Caroline Hoxby, Erzo Luttmer, Andreas Ortmann, Larry Samuelson, and William Sandholm for helpful comments, and to the Russell Sage Foundation and the National Science Foundation for ...nancial support. I also thank Molly Dahl, Liz Richardson, and Manasi Velecha for helpful research assistance.