Endogenous Social Preferences in Bargaining and Contract Enforcement

In this study, we explore the impact of the endogenous nature of social preferences in bargaining on contract enforcement. For this purpose, we conduct laboratory experiments based on a one-shot gift exchange game in the context of firm-worker relationships. Our design admits two types of worker proposals on the contracts to his/her firm, defined as cheap talk. One contains only the desirable wage of the worker, while the other additionally contains his/her future effort. We find that worker preferences become biased in a more self-serving direction by making proposals in bargaining. That is, both types of worker cheap talk undermine reciprocity, thus deteriorating efficiency in an incomplete contract. Additional experiments show that the negative effect of cheap talk in bargaining is robust even for repeated interactions. By contrast, worker proposals including future efforts lead to successful coordination, which outweigh the negative effect on reciprocal behaviors.