LET'S TALK: HOW COMMUNICATION AFFECTS CONTRACT DESIGN | Zendy

Brandts Jordi | Zendy; Ellman Matthew | Zendy; Charness Gary | Zendy

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LET'S TALK: HOW COMMUNICATION AFFECTS CONTRACT DESIGN

Author(s) -

Brandts Jordi,

Ellman Matthew,

Charness Gary

Publication year - 2016

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1111/jeea.12157

Subject(s) - earnings , shock (circulatory) , business , quality (philosophy) , key (lock) , cheap talk , perception , control (management) , microeconomics , economics , computer science , accounting , computer security , psychology , management , medicine , philosophy , epistemology , neuroscience

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. (JEL: C91, D03, D86)

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