Renegotiation, Learning and Relational Contracting
AbstractThis paper empirically examines contract renegotiation and learning in the movie industry under long-term business relationships. The paper develops a theory of renegotiation and learning with incomplete contracts. This theory shows how renegotiation as an ex-post mechanism to adjust participation constraints, together with learning, allows agents to maximize the value of the contractual relationship in the presence of incomplete contracts and long term relationships. The theory defines clear testable implications that I test in the paper. For this purpose, I use a new dataset of revenuesharing contracts and renegotiation outcomes in the Spanish movie industry. I find that movies that perform overall below expectations are renegotiated 20% more often. I find as well that movies are 6 to 8% more likely to be renegotiated in theaters where movie revenues are below the movie average revenues. Following this, I find evidence that economic agents learn across periods about the real movie audience appeal and use the new information to adjust their beliefs and make daily decisions. Finally, I conclude that contractual incompleteness is optimal in this case as long as learning allows firms to cut movie runs optimally.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2005-14.
Length: 25,  p.
Date of creation: Mar 2006
Date of revision:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reiko Suzuki).
If references are entirely missing, you can add them using this form.