Introduction

In modern economics people are conceptualized as being rational and selfish. On the basis of assumptions of rationality and selfishness economists have constructed a remarkable body of theoretical knowledge that allows precise predictions in a wide variety of circumstances. However, there remains the question whether the exclusive reliance on rationality and selfishness is capable of explaining people's actual behavior. We are convinced that there are conditions in which standard economic theory predicts and explains behavior quite well. On the basis of our research, we also believe that there are important and identifiable conditions in which these assumptions lead to empirically false predictions and may, therefore, generate wrong normative advice.

In this chapter we argue that there is an important class of conditions in which predictions that are based on purely selfish behavior are systematically violated. Such conditions regularly arise when it is impossible to enforce agreements completely. Standard economic theory predicts that agreements that are not fully enforceable will never be concluded because at least one of the involved parties will not meet its obligations. But, in turn, this will in general induce the other parties not to meet their obligations. Since everybody will anticipate that the parties will not meet their contractually specified duties it makes no sense to conclude the contract in the first instance. The fact that under conditions of incompletely enforceable contracts many agreements cannot or will not be concluded gives rise to severe efficiency losses.