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Title:Let's talk: How communication affects contract design PDF Logo
Authors:Brandts, Jordi
Charness, Gary
Ellman, Matthew
Issue Date:2012
Series/Report no.:CESifo Working Paper: Behavioural Economics 3883
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.
Subjects:contract design
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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