Promises and Reliance

Abstract: A promisee’s reliance on a promise makes him vulnerable to promise breaking. In the absence of legal sanctions for promise breaking, this vulnerability has no effect on a self-interested promisor’s willingness to keep her promise: she will keep it only if it is in her self-interest to do so. But if a promisor cares about the promisee, then she may feel guilty for breaking her promise, and this guilt may be intensified by the promisee’s reliance on the promise, giving the promisee a strategic reason to overrely—that is, choose a reliance level in excess of the level that would be efficient if the promisor kept her promise—in order to psychologically lock in the promisor by giving her more reasons to keep her promise. This suggests that a legal regime that enforces relied-upon promises may have the unexpected benefit of reducing overreliance: the promisee can lock in the promisor using the legal regime rather than the promisor’s guilt. We test these hypotheses by experimentally investigating person’s attitudes towards promisees’ reliance decisions and their behavioral responses to promissory estoppel regimes in the laboratory. We find evidence supporting the existence of a psychological lock-in effect: promisors are more willing to cooperate the greater was the promisee’s reliance, and promisees anticipate this effect, overinvesting apparently in order to encourage promisors’ to keep their promises. We also find that the introduction of a legal regime improves cooperation rates, and that when the remedy is expectation damages, the legal regime generates unambiguously better decisions by reducing overinvestment. Finally, we find that the introduction of a promissory estoppel regime crowds out cooperation when promisees don’t rely on a promise.