Let’s Talk: How Communication Affects Contract Design

Jordi Brandts, Matthew Ellman () and Gary Charness

Journal of the European Economic Association, 2016, vol. 14, issue 4, 943-974

Abstract: We study experimentally how communication changes the effectiveness of contract types when sellers choose unenforceable quality after a possible cost shock. Communication potentially removes conflicting perceptions that may otherwise plague flexible contracts. Indeed, we find that introducing free-form communication sharply reverses an advantage of rigid contracts in favor of flexible contracts, which then deliver much higher earnings. Control treatments that avoid selection effects reveal a strong parallel shift from rigid to flexible. Chat content analysis identifies clarification of post-shock transfers, promises, and personal rapport as key correlates of high earnings, with clarification working only in conjunction with flexible contracts. A communication channel restricted to clarifying transfer plans also favors use of flexible contracts, but mildly compared to chat.

JEL-codes: C91 D03 D86 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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Related works:
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)
Working Paper: Let's Talk: How Communication Affects Contract Design (2012)
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