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Satisfaction Guaranteed: When Moral Hazard meets Moral Preferences

James Andreoni

NBER Working Paper No. 23352
Issued in April 2017
NBER Program(s):The Industrial Organization Program, The Law and Economics Program, The Public Economics Program

Theorists and policy analysts have convincingly argued that greater trust makes a more efficient society by eliminating costly contracts or expensive reputations. Concurrently, experiments suggest 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 find that satisfaction guaranteed indeed builds trust and improves efficiency. Interestingly, sellers offering a guarantee are more trustworthy than those who don't, even when honoring it is fully voluntary, but the guarantee only elicits the trust of buyers when it has legal backing.

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Document Object Identifier (DOI): 10.3386/w23352

Published: Andreoni, James. 2018. "Satisfaction Guaranteed: When Moral Hazard Meets Moral Preferences." American Economic Journal: Microeconomics, 10 (4): 159-89. DOI: 10.1257/mic.20170119

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