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Let’s Talk: How Communication Affects Contract Design

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  • Jordi Brandts
  • Matthew Ellman
  • Gary Charness

Abstract

We study experimentally how communication changes the effectiveness of contract types when sellers choose unenforceable quality after a possible cost shock. Communication potentially removes conflicting perceptions that may otherwise plague flexible contracts. Indeed, we find that introducing free-form communication sharply reverses an advantage of rigid contracts in favor of flexible contracts, which then deliver much higher earnings. Control treatments that avoid selection effects reveal a strong parallel shift from rigid to flexible. Chat content analysis identifies clarification of post-shock transfers, promises, and personal rapport as key correlates of high earnings, with clarification working only in conjunction with flexible contracts. A communication channel restricted to clarifying transfer plans also favors use of flexible contracts, but mildly compared to chat.

Suggested Citation

  • Jordi Brandts & Matthew Ellman & Gary Charness, 2016. "Let’s Talk: How Communication Affects Contract Design," Journal of the European Economic Association, European Economic Association, vol. 14(4), pages 943-974.
    • Handle: RePEc:oup:jeurec:v:14:y:2016:i:4:p:943-974.
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    File URL: http://hdl.handle.net/10.1111/jeea.12157
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    Cited by:

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    3. Huang, Lingbo & Xiao, Erte, 2021. "Peer effects in public support for Pigouvian taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 192-204.
    4. Manuel Munoz-Herrera & Ernesto Reuben, 2019. "Business culture: The role of personal and impersonal business relationships on market efficiency," Working Papers 20190027, New York University Abu Dhabi, Department of Social Science, revised Jun 2019.
    5. Simin He & Theo Offerman & Jeroen van de Ven, 2017. "The Sources of the Communication Gap," Management Science, INFORMS, vol. 63(9), pages 2832-2846, September.
    6. Andrey Fradkin, 2012. "Do Online Marketplaces Become More Efficient Over Time?," Working Papers 12-24, NET Institute.
    7. Petra Nieken & Patrick W. Schmitz, 2023. "Contracting under asymmetric information and externalities: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 989-1021, November.
    8. Charness, Gary & Gneezy, Uri & Henderson, Austin, 2018. "Experimental methods: Measuring effort in economics experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 74-87.
    9. Jordi Brandts & Valeska Groenert & Christina Rott, 2015. "The Impact of Advice on Women's and Men's Selection into Competition," Management Science, INFORMS, vol. 61(5), pages 1018-1035, May.
    10. Gary Charness & David J. Cooper & Zachary Grossman, 2020. "Silence is golden: team problem solving and communication costs," Experimental Economics, Springer;Economic Science Association, vol. 23(3), pages 668-693, September.
    11. Bartling, Björn & Grieder, Manuel & Zehnder, Christian, 2017. "Competitive pricing reduces wasteful counterproductive behaviors," Journal of Public Economics, Elsevier, vol. 156(C), pages 34-47.
    12. Sebastian Kunte & Meike Wollni & Claudia Keser, 2017. "Making it personal: breach and private ordering in a contract farming experiment," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 44(1), pages 121-148.
    13. David Frydlinger & Oliver D. Hart, 2019. "Overcoming Contractual Incompleteness: The Role of Guiding Principles," NBER Working Papers 26245, National Bureau of Economic Research, Inc.
    14. 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.
    15. Erkut, Hande & Reuben, Ernesto, 2023. "Social networks and organizational helping behavior: Experimental evidence from the helping game," Discussion Papers, Research Unit: Market Behavior SP II 2023-203, WZB Berlin Social Science Center.
    16. Kunte, Sebastian & Wollni, Meike, 2015. "Risky Environments, Hidden Knowledge, and Preferences for Contract Flexibility: An Artefactual Field Experiment," GlobalFood Discussion Papers 205914, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    17. Hoppe, Eva I. & Schmitz, Patrick W., 2018. "Hidden action and outcome contractibility: An experimental test of moral hazard theory," Games and Economic Behavior, Elsevier, vol. 109(C), pages 544-564.
    18. Jordi Brandts & David J. Cooper, 2020. "Managerial Leadership, Truth-Telling, and Efficient Coordination," Working Papers 1211, Barcelona School of Economics.
    19. Charness, Gary & Cobo-Reyes, Ramón & Jiménez, Natalia & Lacomba, Juan A. & Lagos, Francisco, 2017. "Job security and long-term investment: An experimental analysis," European Economic Review, Elsevier, vol. 95(C), pages 195-214.
    20. Jordi Brandts & David J. Cooper, 2018. "Truth Be Told An Experimental Study of Communication and Centralization," Working Papers 1046, Barcelona School of Economics.
    21. Gilles Grandjean & Marco Mantovani & Ana Mauleon & Vincent Vannetelbosch, 2014. "Whom are you talking with? An experiment on credibility and communication structure," Working Papers 285, University of Milano-Bicocca, Department of Economics, revised Oct 2014.
    22. Tore Ellingsen & Eirik Gaard Kristiansen, 2022. "Fair and Square: A Retention Model of Managerial Compensation," Management Science, INFORMS, vol. 68(5), pages 3604-3624, May.
    23. Hatzigeorgiou, Andreas & Karpaty, Patrik & Kneller, Richard & Lodefalk, Magnus, 2016. "Immigrant Employment and the Contract Enforcement Costs of Offshoring," Working Papers 2016:7, Örebro University, School of Business, revised 01 Feb 2022.
    24. Grieco, Daniela & Bripi, Francesco, 2022. "Participation of charity beneficiaries," Journal of Economic Behavior & Organization, Elsevier, vol. 199(C), pages 1-17.
    25. Oliver Hart, 2017. "Incomplete Contracts and Control," American Economic Review, American Economic Association, vol. 107(7), pages 1731-1752, July.

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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