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Promises & Partnership

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We examine, experimentally and theoretically, how communication within a partnership may mitigate the problem (highlighted in contract theory) of hidden action. What is the form and content of the communication? Which model of decision-making can capture the impact of communication? We consider free-form communication, measure beliefs (about actions and beliefs), and examine which motivational forces influence subjects. We find they harbor belief-dependent preferences that can be captured using psychological game theory. In particular, agents are influenced by guilt aversion, which suggests a theory of why and how communication influences behavior in which statements of intent and resulting expectations play a special role. This has bearing on how to understand partnerships and contracts.

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File URL: http://www2.ne.su.se/paper/wp03_03.pdf
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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2003:3.

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Length: 46 pages
Date of creation: 13 Feb 2003
Handle: RePEc:hhs:sunrpe:2003_0003
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Department of Economics, Stockholm, S-106 91 Stockholm, Sweden

Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
Web page: http://www.ne.su.se/
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