IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp11712.html
   My bibliography  Save this paper

More than the Money: Payoff-Irrelevant Terms in Relational Contracts

Author

Listed:
  • Cromwell, Erich

    (U.S. Equal Employment Opportunity Commission)

  • Goerg, Sebastian J.

    (Technische Universität München)

  • Leszczynska, Monika

    (New York University School of Law)

Abstract

We investigate how payoff-irrelevant terms can negatively impact relational contracts. In a lab experiment we compare two economically equivalent contracts – a fixed-term renewable and an open-ended at-will contract. Each contract provides partners with full flexibility regarding the length and termination of their interaction. When only one contract type is available, principals and agents in our experiment manage to form long-term profitable relationships irrespective of the contract type. However, when both contracts are available offering a fixed-term instead of an open-ended contract is perceived as unkind and results in lower effort provided by the agents. We show that this observed difference is not a matter of sorting, but a direct response to the contract type. Our results demonstrate that a relational contract might be affected by payoff-irrelevant terms and their perceived kindness.

Suggested Citation

  • Cromwell, Erich & Goerg, Sebastian J. & Leszczynska, Monika, 2018. "More than the Money: Payoff-Irrelevant Terms in Relational Contracts," IZA Discussion Papers 11712, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp11712
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp11712.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    2. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    3. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    4. Ben Greiner, 2004. "The Online Recruitment System ORSEE 2.0 - A Guide for the Organization of Experiments in Economics," Working Paper Series in Economics 10, University of Cologne, Department of Economics.
    5. Danilov, Anastasia & Sliwka, Dirk, 2013. "Can Contracts Signal Social Norms? Experimental Evidence," IZA Discussion Papers 7477, Institute of Labor Economics (IZA).
    6. Ben Greiner, 2004. "The Online Recruitment System ORSEE - A Guide for the Organization of Experiments in Economics," Papers on Strategic Interaction 2003-10, Max Planck Institute of Economics, Strategic Interaction Group.
    7. David Dickinson & Marie Claire Villeval, 2008. "Does Monitoring Decrease Work Effort?," Post-Print halshs-00276284, HAL.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Klaus M. Schmidt & Martin Spann & Robert Zeithammer, 2015. "Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets," Management Science, INFORMS, vol. 61(6), pages 1217-1236, June.
    2. Goeschl, Timo & Jarke, Johannes, 2016. "Second and third party punishment under costly monitoring," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 124-133.
    3. Gerald Eisenkopf & Urs Fischbacher, 2015. "Naïve Responses to Kind Delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 36(7), pages 487-498, October.
    4. Tobias Regner, 2018. "Reciprocity under moral wiggle room: Is it a preference or a constraint?," Experimental Economics, Springer;Economic Science Association, vol. 21(4), pages 779-792, December.
    5. Boosey, Luke & Goerg, Sebastian, 2020. "The timing of discretionary bonuses – effort, signals, and reciprocity," Games and Economic Behavior, Elsevier, vol. 124(C), pages 254-280.
    6. Emma von Essen & Marieke Huysentruyt & Topi Miettinen, 2019. "Exploration in Teams and the Encouragement Effect: Theory and Evidence," Economics Working Papers 2019-10, Department of Economics and Business Economics, Aarhus University.
    7. Felix Kolle, 2012. "Heterogeneity and Cooperation in Privileged Groups: The Role of Capability and Valuation on Public Goods Provision," Discussion Papers 2012-07, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    8. Herrera, Helios & Reuben, Ernesto & Ting, Michael M., 2017. "Turf wars," Journal of Public Economics, Elsevier, vol. 152(C), pages 143-153.
    9. Halbheer, Daniel & Fehr, Ernst & Goette, Lorenz & Schmutzler, Armin, 2009. "Self-reinforcing market dominance," Games and Economic Behavior, Elsevier, vol. 67(2), pages 481-502, November.
    10. Kölle, Felix & Gächter, Simon & Quercia, Simone, 2014. "The ABC of Cooperation in Voluntary Contribution and Common Pool Extraction Games," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100417, Verein für Socialpolitik / German Economic Association.
    11. Großer, Jens & Reuben, Ernesto, 2013. "Redistribution and market efficiency: An experimental study," Journal of Public Economics, Elsevier, vol. 101(C), pages 39-52.
    12. Fahn, Matthias, 2019. "Reciprocity in Dynamic Employment Relationships," Rationality and Competition Discussion Paper Series 198, CRC TRR 190 Rationality and Competition.
    13. Kerschbamer, Rudolf, 2015. "The geometry of distributional preferences and a non-parametric identification approach: The Equality Equivalence Test," European Economic Review, Elsevier, vol. 76(C), pages 85-103.
    14. Heinz, Matthias & Drzensky, Frank, 2013. "The Hidden Costs of Downsizing," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79764, Verein für Socialpolitik / German Economic Association.
    15. Hannes Koppel & Tobias Regner, 2014. "Corporate Social Responsibility in the work place," Experimental Economics, Springer;Economic Science Association, vol. 17(3), pages 347-370, September.
    16. Bruttel, Lisa & Eisenkopf, Gerald, 2012. "No contract or unfair contract: What's better?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(4), pages 384-390.
    17. repec:cgr:cgsser:03-08 is not listed on IDEAS
    18. Königstein, Manfred & Ruchala, Gabriele K., 2007. "Performance Pay, Group Selection and Group Performance," IZA Discussion Papers 2697, Institute of Labor Economics (IZA).
    19. Nicolas Fugger & Elena Katok & Achim Wambach, 2019. "Trust in Procurement Interactions," Management Science, INFORMS, vol. 65(11), pages 5110-5127, November.
    20. Lisa Bruttel & Gerald Eisenkopf, 2009. "Incentive Compatible Contracts?," TWI Research Paper Series 43, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    21. Belot, Michèle & Schröder, Marina, 2013. "Sloppy work, lies and theft: A novel experimental design to study counterproductive behaviour," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 233-238.

    More about this item

    Keywords

    contract design; relational contracts; reciprocity; trust;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp11712. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.