Cooperation and Mistrust in Relational Contracts

University of Zurich, Department of Economics, Working Paper No. 233

42 Pages Posted: 25 Aug 2016

See all articles by Holger Herz

Holger Herz

University of Zurich

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

André Volk

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: August 15, 2016

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 relationships. Under incomplete information, payoffs to actions become private information. 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 information 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.

Keywords: Relational contracts, incomplete information, experiments

JEL Classification: D01, D03, L14, L20

Suggested Citation

Herz, Holger and Schmutzler, Armin and Volk, André, Cooperation and Mistrust in Relational Contracts (August 15, 2016). University of Zurich, Department of Economics, Working Paper No. 233. Available at SSRN: https://ssrn.com/abstract=2828709 or http://dx.doi.org/10.2139/ssrn.2828709

Holger Herz (Contact Author)

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Armin Schmutzler

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

André Volk

Independent ( email )

No Address Available

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