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Cooperation and mistrust in relational contracts

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  • Herz, Holger
  • Schmutzler, Armin
  • Volk, André

Abstract

Work and trade relationships are often governed by relational contracts, in which incentives for cooperative action today stem from the prospective future benefits of the relationship. In this paper, we study how a lack of hard information about the costs of providing quality, and therefore about the financial consequences of actions, affects relational contracts in buyer-seller relationships. The absence of verifiable information can impede the joint understanding of what constitutes cooperative behavior, and may thus inject mistrust into relationships. Comparing seller-buyer relationships with hard (verifiable) and soft (non-verifiable) information about seller costs in the laboratory, we find that soft information affects the terms of relational contracts. However, the party negatively affected by these adjustments does not reciprocate with efficiency-reducing actions. We therefore find that asymmetric information only affects the distribution of rents, and not efficiency.

Suggested Citation

  • Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
  • Handle: RePEc:eee:jeborg:v:166:y:2019:i:c:p:366-380
    DOI: 10.1016/j.jebo.2019.07.007
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    References listed on IDEAS

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    Cited by:

    1. Robert S. Gibbons & Manuel Grieder & Holger Herz & Christian Zehnder, 2019. "Organizational Culture as Equilibrium? Rules Versus Principles in Building Relational Contracts," CESifo Working Paper Series 7871, CESifo Group Munich.

    More about this item

    Keywords

    Relational contracts; Non-Verifiable information; Experiments;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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