Putting relational contract theory to the test: experimental evidence

Nisvan Erkal, Steven Y. Wu () and Brian Roe
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Steven Y. Wu: Purdue University

Experimental Economics, 2022, vol. 25, issue 1, No 4, 139 pages

Abstract: Abstract We investigate a number of canonical predictions that arise from relational contract theory. Employing an experimental design with endogenous choice of contract type, we find considerable experimental support for several well-established predictions, including the importance of self-enforcement and individual rationality constraints for contractual performance; a preference for informal agreements when third-party verification of performance is coarse; and a tendency toward strategic ambiguity (Bernheim and Whinston Am Econ Rev 88(4):902–932, 1998). However, two findings that appear to be inconsistent with theory are that (1) contractually specified performance levels do not appear to respond to the discount factor though realized performance does; and (2) subjects often apply inefficient punishments following a deviation. By providing evidence on the strengths and weaknesses of standard relational contract theory, our study shows where there is room for improvement. We conjecture that incorporating social preferences and semi-grim strategies (Breitmoser Am Econ Rev 105(9):2882–2910, 2015) can potentially address the observed weaknesses.

Keywords: Relational contracts; Repeated transaction; Explicit incentives; Strategic ambiguity; Experiments (search for similar items in EconPapers)
JEL-codes: C73 C91 D86 J41 L14 L24 M52 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10683-021-09707-w

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