Let’s talk: How communication affects contract design

Gary Charness, Jordi Brandts and Matthew Ellman ()

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: We study experimentally how the ability to communicate affects the frequency andeffectiveness of flexible and inflexible contracts in a bilateral trade context where sellers canadjust trade quality after observing a post-contractual cost shock and a discretionary buyertransfer. In the absence of communication, we find that rigid contracts are more frequent andlead 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 andsellers. Also, both buyer and seller earn considerably more from flexible with communicationthan rigid without communication. Our results show quite strongly that communication, a normalfeature in contracting, can remove the potential cost of flexibility (disagreements caused byconflicting perceptions). We offer an explanation based on social norms.

Keywords: Social and Behavioral Sciences; experimental; contracts; bilateral trade; cost shock; discretionary buyer transfer (search for similar items in EconPapers)
Date: 2012-06-16
New Economics Papers: this item is included in nep-exp
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Citations: View citations in EconPapers (7)

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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 (2015)
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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