IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v66y2020i5p1868-1889.html
   My bibliography  Save this article

Relational Adaptation Under Reel Authority

Author

Listed:
  • Daniel Barron

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208;)

  • Robert Gibbons

    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139;)

  • Ricard Gil

    (Smith School of Business, Queen's University, Kingston, Ontario K7L 2P3, Canada;)

  • Kevin J.Murphy

    (USC Marshall School of Business, University of Southern California, Los Angeles, California 90089)

Abstract

We study relationships between parties who have different preferences about how to tailor decisions to changing circumstances. Our model suggests that relational contracts supported by formal contracts may achieve relational adaptation that improves on adaptation decisions achieved by formal or relational contracts alone. Our empirics consider revenue-sharing contracts between movie distributors and an exhibitor. The exhibitor has discretion about whether and when to show a movie, and the parties frequently renegotiate formal contracts after a movie has finished its run. We document that such ex post renegotiation is consistent with the distributor rewarding the exhibitor for adaptation decisions that improve their joint payoffs.

Suggested Citation

  • Daniel Barron & Robert Gibbons & Ricard Gil & Kevin J.Murphy, 2020. "Relational Adaptation Under Reel Authority," Management Science, INFORMS, vol. 66(5), pages 1868-1889, May.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:5:p:1868-1889
    DOI: 10.1287/mnsc.2019.3292
    as

    Download full text from publisher

    File URL: https://doi.org/10.1287/mnsc.2019.3292
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2019.3292?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
    2. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1285-1320.
    3. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 1-48.
    4. Goldberg, Victor P & Erickson, John R, 1987. "Quantity and Price Adjustment in Long-term Contracts: A Case Study of Petroleum Coke," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 369-398, October.
    5. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    6. Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, Econometric Society, vol. 52(1), pages 87-100, January.
    7. Pol Antràs & C. Fritz Foley, 2015. "Poultry in Motion: A Study of International Trade Finance Practices," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 853-901.
    8. Keith J. Crocker & Kenneth J. Reynolds, 1993. "The Efficiency of Incomplete Contracts: An Empirical Analysis of Air Force Engine Procurement," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 126-146, Spring.
    9. Stuart L. Gillan & Jay C. Hartzell & Robert Parrino, 2009. "Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements," Journal of Finance, American Finance Association, vol. 64(4), pages 1629-1655, August.
    10. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Econometrica, Econometric Society, vol. 62(2), pages 257-282, March.
    11. Benjamin Klein, 2000. "The Role of Incomplete Contracts in Self-Enforcing Relationships," Revue d'Économie Industrielle, Programme National Persée, vol. 92(1), pages 67-80.
    12. Rocco Macchiavello & Ameet Morjaria, 2015. "The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports," American Economic Review, American Economic Association, vol. 105(9), pages 2911-2945, September.
    13. Jed DeVaro & Jin‐Hyuk Kim & Nick Vikander, 2018. "Non‐performance Pay and Relational Contracting: Evidence from CEO Compensation," Economic Journal, Royal Economic Society, vol. 128(613), pages 1923-1951, August.
    14. Ricard Gil & Francine Lafontaine, 2012. "Using Revenue Sharing to Implement Flexible Prices: Evidence from Movie Exhibition Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 187-219, June.
    15. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    16. Ricard Gil & Giorgio Zanarone, 2018. "On the determinants and consequences of informal contracting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 726-741, October.
    17. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    18. Masten, Scott E & Crocker, Keith J, 1985. "Efficient Adaptation in Long-term Contracts: Take-or-Pay Provisions for Natural Gas," American Economic Review, American Economic Association, vol. 75(5), pages 1083-1093, December.
    19. Jin Li & Niko Matouschek & Michael Powell, 2017. "Power Dynamics in Organizations," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 217-241, February.
    20. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
    21. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1635-1677.
    22. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    23. Keith J. Crocker & Scott E. Masten, 1988. "Mitigating Contractual Hazards: Unilateral Options and Contract Length," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 327-343, Autumn.
    24. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(4), pages 541-559.
    25. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    26. Julie H. Mortimer, 2008. "Vertical Contracts in the Video Rental Industry -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 165-199.
    27. Hongbin Cai & Hongbin Li & Li‐An Zhou, 2010. "Incentives, Equality And Contract Renegotiations: Theory And Evidence In The Chinese Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 156-189, March.
    28. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    29. Dana, James D, Jr & Spier, Kathryn E, 2001. "Revenue Sharing and Vertical Control in the Video Rental Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 223-245, September.
    30. Crocker, Keith J & Masten, Scott E, 1991. "Pretia ex Machina? Prices and Process in Long-Term Contracts," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 69-99, April.
    31. Darren Filson & David Switzer & Portia Besocke, 2005. "At the Movies: The Economics of Exhibition Contracts," Economic Inquiry, Western Economic Association International, vol. 43(2), pages 354-369, April.
    32. Mukherji, Ananda & Francis, John D., 2008. "Mutual adaptation in buyer-supplier relationships," Journal of Business Research, Elsevier, vol. 61(2), pages 154-161, February.
    33. James D. Dana, Jr. & Kathryn E. Spier, 2001. "Revenue Sharing and Vertical Control in the Video Rental Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 223-245, September.
    34. Ricard Gil, 2013. "The Interplay of Formal and Relational Contracts: Evidence from Movies," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(3), pages 681-710, June.
    35. F. Andrew, 2002. "Revenue-Sharing in Movie Exhibition and the Arrival of Sound," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 380-402, July.
    36. Clive Bull, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 147-159.
    37. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-123, May.
    38. Ricard Gil, 2009. "Revenue Sharing Distortions and Vertical Integration in the Movie Industry," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 579-610, October.
    39. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    40. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-157, January.
    41. Silke Januszewski Forbes & Mara Lederman, 2009. "Adaptation and Vertical Integration in the Airline Industry," American Economic Review, American Economic Association, vol. 99(5), pages 1831-1849, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giacomo Calzolari & Leonardo Felli & Johannes Koenen & Giancarlo Spagnolo & Konrad O. Stahl, 2021. "Relational Contracts and Trust in a High-Tech Industry," CRC TR 224 Discussion Paper Series crctr224_2021_316, University of Bonn and University of Mannheim, Germany.
    2. Jin‐Hyuk Kim & Nick Vikander, 2023. "Commitment and discretion in contracts: theory and evidence from retirement plans," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(2), pages 461-488, April.
    3. Macchiavello, Rocco & Morjaria, Ameet, 2022. "Empirical approaches to trust and relational contracts," International Journal of Industrial Organization, Elsevier, vol. 84(C).
    4. Matthias Fahn & Giorgio Zanarone, 2022. "Transparency in relational contracts," Strategic Management Journal, Wiley Blackwell, vol. 43(5), pages 1046-1071, May.
    5. Ricard Gil & Myongjin Kim & Giorgio Zanarone, 2022. "Relationships Under Stress: Relational Outsourcing in the U.S. Airline Industry After the 2008 Financial Crisis," Management Science, INFORMS, vol. 68(2), pages 1256-1277, February.
    6. Andrea Bafundi & Riccardo Camboni & Edoardo Grillo & Paola Valbonesi, 2023. "Public Procurement and the Risk of Severe Weather Events," "Marco Fanno" Working Papers 0303, Dipartimento di Scienze Economiche "Marco Fanno".
    7. Desmond (Ho‐Fu) Lo & Giorgio Zanarone & Mrinal Ghosh, 2022. "Contracting to (dis)incentivize? An integrative transaction‐cost approach on how contracts govern specific investments," Strategic Management Journal, Wiley Blackwell, vol. 43(8), pages 1528-1555, August.
    8. Jordi McKenzie, 2023. "The economics of movies (revisited): A survey of recent literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 480-525, April.
    9. Juan‐José Ganuza & Fernando Gomez, 2022. "Designing relational sanctions in buyer–supplier relationships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(2), pages 470-491, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ricard Gil & Myongjin Kim & Giorgio Zanarone, 2022. "Relationships Under Stress: Relational Outsourcing in the U.S. Airline Industry After the 2008 Financial Crisis," Management Science, INFORMS, vol. 68(2), pages 1256-1277, February.
    2. Ricard Gil & Giorgio Zanarone, 2018. "On the determinants and consequences of informal contracting," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 726-741, October.
    3. Contreras Oscar F. & Giorgio Zanarone, 2018. "Managing Social Comparison Costs in Organizations," Working Papers 2018-25, Banco de México.
    4. Macchiavello, Rocco & Miquel-Florensa, Josepa, 2017. "Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain," CEPR Discussion Papers 11874, C.E.P.R. Discussion Papers.
    5. Jean Beuve & Stéphane Saussier, 2012. "Interfirm cooperation in strategic relationships: the role of formal contract," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 21(4), pages 811-836, August.
    6. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    7. Desmond (Ho‐Fu) Lo & Giorgio Zanarone & Mrinal Ghosh, 2022. "Contracting to (dis)incentivize? An integrative transaction‐cost approach on how contracts govern specific investments," Strategic Management Journal, Wiley Blackwell, vol. 43(8), pages 1528-1555, August.
    8. Michler, Jeffrey D. & Wu, Steven Y., 2020. "Governance and contract choice: Theory and evidence from groundwater irrigation markets," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 129-147.
    9. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    10. Gibbons, Robert, 2005. "Four forma(lizable) theories of the firm?," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 200-245, October.
    11. Giorgio Zanarone & Desmond (Ho-Fu) Lo & Tammy L. Madsen, 2016. "The double-edged effect of knowledge acquisition: How contracts safeguard pre-existing resources," Strategic Management Journal, Wiley Blackwell, vol. 37(10), pages 2104-2120, October.
    12. W. Bentley MacLeod & James M. Malcomson, 2023. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment: Thirty Years On," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 470-499.
    13. Matthias Fahn & Ray Rees & Amelie Wuppermann, 2016. "Relational contracts for household formation, fertility choice and separation," Journal of Population Economics, Springer;European Society for Population Economics, vol. 29(2), pages 421-455, April.
    14. Liu, Dan & Meagher, Kieron J. & Wait, Andrew, 2022. "Market conditions and firm morality: Employee trust in the honesty of their managers," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 89-106.
    15. Robert Gibbons, 2010. "Transaction‐Cost Economics: Past, Present, and Future?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 263-288, June.
    16. Jin‐Hyuk Kim & Nick Vikander, 2023. "Commitment and discretion in contracts: theory and evidence from retirement plans," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(2), pages 461-488, April.
    17. Gine,Xavier & Jacoby,Hanan G. & Gine,Xavier & Jacoby,Hanan G., 2016. "Markets, contracts, and uncertainty in a groundwater economy," Policy Research Working Paper Series 7694, The World Bank.
    18. Anjana Susarla, 2012. "Contractual Flexibility, Rent Seeking, and Renegotiation Design: An Empirical Analysis of Information Technology Outsourcing Contracts," Management Science, INFORMS, vol. 58(7), pages 1388-1407, July.
    19. George Hendrikse & Patrick Hippmann & Josef Windsperger, 2015. "Trust, transaction costs and contractual incompleteness in franchising," Small Business Economics, Springer, vol. 44(4), pages 867-888, April.
    20. Giorgio Zanarone, 2012. "Coase (1937) revisited: Endogenous fiat in firms and markets," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 59(2), pages 201-221, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:66:y:2020:i:5:p:1868-1889. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.