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Cheap-talk evaluations in contract design

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  • Du, Ninghua
  • Shahriar, Quazi

Abstract

This study proposes ex-post cheap-talk evaluations as a potential behavioral force in contract designs. Specifically, in a one shot gift-exchange game between a firm and a worker, we experimentally investigate whether a worker's preference for avoiding (seeking) written expression of disapproval (approval) from the firm can induce higher effort from the worker and thereby improve efficiency. We find that, compared to the no-evaluation condition, free-form evaluation increases both effort and efficiency significantly while structured evaluation does not. To identify the channel through which free-form evaluation succeeds, we run additional treatments that allow the firm to communicate its desired effort beforehand. We find that free-form evaluation still achieves the highest level of actual effort while desired efforts are similar across evaluation protocols. If the firm's desired effort serves as a proxy for the firm's expected effort, then this suggests that free-form evaluation's success is due to the saliency of these messages in the worker's preference rather than the worker's belief of the firm's expectation.

Suggested Citation

  • Du, Ninghua & Shahriar, Quazi, 2018. "Cheap-talk evaluations in contract design," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 77(C), pages 78-87.
    • Handle: RePEc:eee:soceco:v:77:y:2018:i:c:p:78-87
    DOI: 10.1016/j.socec.2018.09.008
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    More about this item

    Keywords

    Evaluation; Contract Design; Gift-exchange; Experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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