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Let's Talk: How Communication Affects Contract Design


  • Jordi Brandts
  • Gary Charness
  • Matthew Ellman


We study experimentally how the ability to communicate affects the frequency and effectiveness of flexible and inflexible contracts in a bilateral trade context where sellers can adjust trade quality after observing a post-contractual cost shock and a discretionary buyer transfer. In the absence of communication, we find that rigid contracts are more frequent and lead to higher earnings for both buyer and seller. By contrast, in the presence of communication, flexible contracts are much more frequent and considerably more productive, both for buyers and sellers. Also, both buyer and seller earn considerably more from flexible with communication than rigid without communication. Our results show quite strongly that communication, a normal feature in contracting, can remove the potential cost of flexibility (disagreements caused by conflicting perceptions). We offer an explanation based on social norms.

Suggested Citation

  • Jordi Brandts & Gary Charness & Matthew Ellman, 2012. "Let's Talk: How Communication Affects Contract Design," Working Papers 648, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:648

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    References listed on IDEAS

    1. Eric Maskin & John Moore, 1999. "Implementation and Renegotiation," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 39-56.
    2. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 817-869.
    3. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
    4. Matthew Ellman & Paul Pezanis-Christou, 2010. "Organizational Structure, Communication, and Group Ethics," American Economic Review, American Economic Association, vol. 100(5), pages 2478-2491, December.
    5. Oprea, Ryan & Charness, Gary & Friedman, Daniel, 2014. "Continuous time and communication in a public-goods experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 212-223.
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    Cited by:

    1. repec:eee:eecrev:v:95:y:2017:i:c:p:195-214 is not listed on IDEAS
    2. 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.
    3. repec:eee:pubeco:v:156:y:2017:i:c:p:34-47 is not listed on IDEAS
    4. Kunte, Sebastian & Wollni, Meike & Keser, Claudia, 2014. "Making it personal: breach and private ordering in a contract farming experiment," Discussion Papers 186136, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    5. Hatzigeorgiou, Andreas & Karpaty, Patrik & Kneller, Richard & Lodefalk, Magnus, 2016. "Do Immigrants Spur Offshoring? Firm-Level Evidence," Ratio Working Papers 282, The Ratio Institute.
    6. GRANDJEAN, Gilles & MANTOVANI, Marco & MAULEON, Ana & VANNETELBOSCH, Vincent, 2014. "Whom are you talking with ? An experiment on credibility and communication structure," CORE Discussion Papers 2014042, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. repec:aea:aecrev:v:107:y:2017:i:7:p:1731-52 is not listed on IDEAS

    More about this item


    communication; contracts; perceptions and cooperation;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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