Let's Talk: How Communication Affects Contract Design

Gary Charness, Matthew Ellman () and Jordi Brandts

No 648, Working Papers from Barcelona School of Economics

Abstract: We study experimentally how the ability to communicate affects the frequency and effectiveness of flexible and inflexible contracts in a bilateral trade context where sellers can adjust trade quality after observing a post-contractual cost shock and a discretionary buyer transfer. In the absence of communication, we find that rigid contracts are more frequent and lead to higher earnings for both buyer and seller. By contrast, in the presence of communication, flexible contracts are much more frequent and considerably more productive, both for buyers and sellers. Also, both buyer and seller earn considerably more from flexible with communication than rigid without communication. Our results show quite strongly that communication, a normal feature in contracting, can remove the potential cost of flexibility (disagreements caused by conflicting perceptions). We offer an explanation based on social norms.

Keywords: contracts; communication; perceptions and cooperation (search for similar items in EconPapers)
JEL-codes: C91 D03 D63 D86 J41 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: LET'S TALK: HOW COMMUNICATION AFFECTS CONTRACT DESIGN (2016)
Journal Article: Let’s Talk: How Communication Affects Contract Design (2016)
Working Paper: Let's talk: How communication affects contract design (2012)
Working Paper: Let’s talk: How communication affects contract design (2012)
Working Paper: Let's Talk: How Communication Affects Contract Design (2012)
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