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Cheap-talk evaluations in contract design

Ninghua Du and Quazi Shahriar

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2018, vol. 77, issue C, 78-87

Abstract: This study proposes ex-post cheap-talk evaluations as a potential behavioral force in contract designs. Specifically, in a one shot gift-exchange game between a firm and a worker, we experimentally investigate whether a worker's preference for avoiding (seeking) written expression of disapproval (approval) from the firm can induce higher effort from the worker and thereby improve efficiency. We find that, compared to the no-evaluation condition, free-form evaluation increases both effort and efficiency significantly while structured evaluation does not. To identify the channel through which free-form evaluation succeeds, we run additional treatments that allow the firm to communicate its desired effort beforehand. We find that free-form evaluation still achieves the highest level of actual effort while desired efforts are similar across evaluation protocols. If the firm's desired effort serves as a proxy for the firm's expected effort, then this suggests that free-form evaluation's success is due to the saliency of these messages in the worker's preference rather than the worker's belief of the firm's expectation.

Keywords: Evaluation; Contract Design; Gift-exchange; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D02 D03 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.socec.2018.09.008

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