The Interplay of Formal and Relational Contracts: Evidence from Movies
60 Pages Posted: 26 Jun 2009 Last revised: 28 Oct 2009
Date Written: October 26, 2009
This paper empirically examines the interplay of formal and relational contracting in the Spanish movie industry. To do so, I test implications from well-established theories on relational contracting using a unique data set from a Spanish movie exhibitor that contains detailed information on the use of formal contracts and ex-post contractual adjustments. My results show that distributors are more likely to use formal contracts for movies of higher expected value because exhibitors face stronger reneging temptations for this type of movies. Conditional on using a formal contract, I find that ex-post renegotiation is more likely to occur when the movie performs below expectations. Similarly, movies are more likely to have their run extended if they perform above expectations and I provide evidence of learning indicating that theaters use new information to optimally decide when to stop the movie run. Finally, I estimate outcomes for two different counterfactual scenarios where firms can only rely on formal contracting and show that relational contracting almost doubles the run length and the box office revenues of a movie in a theater.
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