The Interplay of Formal and Relational Contracts: Evidence from Movies

60 Pages Posted: 26 Jun 2009 Last revised: 28 Oct 2009

See all articles by Ricard Gil

Ricard Gil

Queen's University (Canada) - Smith School of Business; Johns Hopkins University - Carey Business School

Date Written: October 26, 2009

Abstract

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.

Suggested Citation

Gil, Ricard, The Interplay of Formal and Relational Contracts: Evidence from Movies (October 26, 2009). Available at SSRN: https://ssrn.com/abstract=1425833 or http://dx.doi.org/10.2139/ssrn.1425833

Ricard Gil (Contact Author)

Queen's University (Canada) - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu

Register to save articles to
your library

Register

Paper statistics

Downloads
87
rank
283,666
Abstract Views
502
PlumX Metrics