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Cooperation and mistrust in relational contracts


Herz, Holger; Schmutzler, Armin; Volk, André (2016). Cooperation and mistrust in relational contracts. Working paper series / Department of Economics 233, University of Zurich.

Abstract

Work and trade relationships are often governed by relational contracts, in which incentives for cooperative action today stem from the prospective future benefits of the relationship. In this paper, we study how reductions in clarity about the financial consequences of actions, induced by incomplete information about the costs of providing quality, affect relational contracts in buyer-seller relation- ships. Under incomplete information, payoffs to actions become private infor- mation. This can impede the joint understanding of what constitutes cooperative behavior, and may thus inject mistrust into relationships, even if credibility is held constant. Comparing seller-buyer relationships with and without complete infor- mation about seller costs in the laboratory, we find that such a lack of clarity has effects on the terms of relational contracts. However, these effects only concern the distribution of rents, and not efficiency.

Abstract

Work and trade relationships are often governed by relational contracts, in which incentives for cooperative action today stem from the prospective future benefits of the relationship. In this paper, we study how reductions in clarity about the financial consequences of actions, induced by incomplete information about the costs of providing quality, affect relational contracts in buyer-seller relation- ships. Under incomplete information, payoffs to actions become private infor- mation. This can impede the joint understanding of what constitutes cooperative behavior, and may thus inject mistrust into relationships, even if credibility is held constant. Comparing seller-buyer relationships with and without complete infor- mation about seller costs in the laboratory, we find that such a lack of clarity has effects on the terms of relational contracts. However, these effects only concern the distribution of rents, and not efficiency.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D01, D03, L14, L20
Uncontrolled Keywords:Relational contracts, incomplete information, experiments
Language:English
Date:August 2016
Deposited On:24 Aug 2016 13:38
Last Modified:07 Apr 2017 04:40
Series Name:Working paper series / Department of Economics
Number of Pages:40
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp233.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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