Modeling the Antecedents of Incomplete Contract Choice in Bilateral Trade: An Experimental Investigation
40 Pages Posted: 28 Feb 2011
Date Written: February 27, 2011
Whether a contract is complete or incomplete is treated as an exogenous factor in much accounting and economics research, even though the level of completeness of the contract is determined by the negotiating parties. This study conducts an experiment to explore the antecedents of contract choice in a trade setting. Results indicate that the choice of a complete versus an incomplete contract depends on the perceived riskiness of the incomplete contract, which is influenced by the perceived bargaining power and fairness preferences (namely, distributive and procedural fairness) of the contracting parties. A supplemental analysis of expected trade outcomes confirms that individuals do not choose between incomplete and complete contracts randomly. In other words, we find evidence that the choice between an incomplete and a complete contract is the result of a strategic decision influenced by the perceived power and fairness preferences of the contracting parties. Finally, consistent with prior research, we find evidence of self-interested views of fairness and that fairness preferences do not affect expected trade outcomes.
Keywords: incomplete contract, contract choice, negotiating power, fairness, negotiation
JEL Classification: M41
Suggested Citation: Suggested Citation