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Social Preferences and Relational Contracting Performance: An Experimental Investigation

Author

Listed:
  • Brian Roe

    (Ohio State University)

  • Steven Y. Wu

    (Ohio State University)

Abstract

We examine how social preferences affect behavior and surplus in relational contracts. Experimental subjects participate in a contracting environment similar to Brown, Falk, and Fehr [Brown, M., Falk, A. & Fehr, E., “Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] and in social preference experiments adapted from Charness and Rabin [Charness, G. & Rabin, M. “Understanding Social Preferences with Simple Tests.” The Quarterly Journal of Economics 117(2002): 817-869]. Subjects’ behavior during the Charness and Rabin experiment is a significant predictor of behavior and outcomes observed during the subsequent multi-period, finite-horizon, relational- contracting environment, which features market power, unenforceable performance, reputation formation and endogenous matching of trading partners. Compared to subjects who respond to the Charness-Rabin games in a fashion consistent with purely self-interested, competitive or reciprocal social preferences, buyers and sellers with alternative social preference structures engage in contracts with substantially higher quality and price, which leads to greater surplus for both parties. A key difference is that self-interested, competitive and reciprocal buyers respond to early-period shirking by extending subsequent offers that are less generous to the seller, while buyers with other social preferences extend subsequent offers that are more generous. Reciprocal and competitive sellers and, to a lesser extent, self-interested sellers, deliver sub-contractual levels of quality more often, which substantially lowers buyer and total welfare. We conclude that intentional or ‘cold’ measures of social preferences have considerable predictive power in dynamic, interactive (or ‘hot’) economic settings.

Suggested Citation

  • Brian Roe & Steven Y. Wu, 2005. "Social Preferences and Relational Contracting Performance: An Experimental Investigation," Microeconomics 0509006, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpmi:0509006
    Note: Type of Document - pdf; pages: 48. September 2005
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    References listed on IDEAS

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    Cited by:

    1. Kamas, Linda & Preston, Anne, 2012. "Distributive and reciprocal fairness: What can we learn from the heterogeneity of social preferences?," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 538-553.

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    More about this item

    Keywords

    Contracts; relational contracts; implicit contracts; market interaction; experimental economics; repeated transaction; social preferences.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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