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Let’s Talk: How Communication Affects Contract Design

AuthorsEllman, Matthew CSIC ORCID ; Brandts, Jordi CSIC ORCID ; Charness, Gary
Issue Date1-Aug-2016
PublisherOxford University Press
CitationJournal of the European Economic Association 14(4): 943–974 (2016)
AbstractWe 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.
Publisher version (URL)https://doi.org/10.1111/jeea.12157
Appears in Collections:(IAE) Artículos
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