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The Interplay of Formal and Relational Contracts: Evidence from Movies

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  • Ricard Gil

Abstract

This article empirically examines the interplay of formal and relational contracting in the Spanish movie industry. Using institutional knowledge, I extend the existing theory on explicit and implicit contracts to include learning, a critical element of contracting in the movie industry. Subsequently, I show results consistent with the theory using a unique data set from a Spanish movie exhibitor with detailed information on the use of formal contracts and ex post contractual adjustments. My results show that distributors are more likely to use formal contracts for movies of higher expected value. Consistent with well-established results of the relational contracting literature, distributors use formal contracts to deter exhibitors' opportunistic behavior since their reneging temptations from implicit agreements are strongest for this type of movies. Conditional on using a formal contract, I find that ex post renegotiation is more likely to occur when the movie performs below expectations. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • 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.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:3:p:681-710
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    File URL: http://hdl.handle.net/10.1093/jleo/ewr011
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    Cited by:

    1. Hwang, Peter, 2017. "The alliance map: A tool for managing fear and greed in alliances," Business Horizons, Elsevier, vol. 60(5), pages 699-706.
    2. 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.
    3. 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.
    4. Anita Rao & Wesley R. Hartmann, 2015. "Quality vs. variety: Trading larger screens for more shows in the era of digital cinema," Quantitative Marketing and Economics (QME), Springer, vol. 13(2), pages 117-134, June.
    5. 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.
    6. 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.
    7. 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.
    8. Darlene Chisholm & Víctor Fernández-Blanco & S. Abraham Ravid & W. David Walls, 2015. "Economics of motion pictures: the state of the art," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 39(1), pages 1-13, February.
    9. Jed DeVaro & Jin-Hyuk Kim & Nick Vikander, 2014. "Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting," Discussion Papers 14-13, University of Copenhagen. Department of Economics.
    10. Anita Rao & Wesley Hartmann, 2015. "Quality vs. variety: Trading larger screens for more shows in the era of digital cinema," Quantitative Marketing and Economics (QME), Springer, vol. 13(2), pages 117-134, June.
    11. 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.
    12. Juan Prieto-Rodriguez & Fernanda Gutierrez-Navratil & Victoria Ateca-Amestoy, 2015. "Theatre allocation as a distributor’s strategic variable over movie runs," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 39(1), pages 65-83, February.
    13. Jensen, Paul H. & Palangkaraya, Alfons & Webster, Elizabeth, 2015. "Trust and the market for technology," Research Policy, Elsevier, vol. 44(2), pages 340-356.
    14. Gregor Matvos, 2014. "Renegotiation Design: Evidence from National Football League Roster Bonuses," Journal of Law and Economics, University of Chicago Press, vol. 57(2), pages 387-430.

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