Promises and Partnership

We examine, experimentally and theoretically, how communication may mitigate the problem (highlighted in contract theory) of hidden action. Communication dramatically enhances efficient partnership interaction. From the viewpoints of both classical theory and recent social- preference models, this makes for a puzzle. We propose two explanations: dislike of lying and guilt aversion. These explanations link, respectively, words and beliefs about beliefs to motivation, thereby providing the rudiments of a theory why communication matters. Our experimental design admits observation of promises, lies, and beliefs, and we report supporting results.