Let's Talk: How Communication Affects Contract Design. Issue 4 (24th November 2015)

• Record Type: Journal Article
• Authors: Brandts, Jordi; Ellman, Matthew; Charness, Gary
• Is Part Of: Journal of the European Economic Association. Volume 14:Issue 4(2016:Aug.)
• Page Start: 943
• Page End: 974
• Publication Date: 2015-11-24
• Subjects: C91 -- D03 -- D86; Economics -- Periodicals; Économie politique -- Périodiques; Science économique; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 330
• DOI: 10.1111/jeea.12157
• Languages: English
• ISSNs: 1542-4766

Abstract

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.