More than the Money: Payoff-Irrelevant Terms in Relational Contracts

52 Pages Posted: 20 Aug 2018

See all articles by Sebastian J. Goerg

Sebastian J. Goerg

Florida State University - Department of Economics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Monika Leszczynska

New York University School of Law

Erich Cromwell

Government of the United States of America - Equal Employment Opportunity Commission

Abstract

We investigate how payoff-irrelevant terms can negatively impact relational contracts. In a lab experiment we compare two economically equivalent contracts – a fixed-term renewable and an open-ended at-will contract. Each contract provides partners with full flexibility regarding the length and termination of their interaction. When only one contract type is available, principals and agents in our experiment manage to form long-term profitable relationships irrespective of the contract type. However, when both contracts are available offering a fixed-term instead of an open-ended contract is perceived as unkind and results in lower effort provided by the agents. We show that this observed difference is not a matter of sorting, but a direct response to the contract type. Our results demonstrate that a relational contract might be affected by payoff-irrelevant terms and their perceived kindness.

Keywords: contract design, relational contracts, reciprocity, trust

JEL Classification: C92, K12

Suggested Citation

Goerg, Sebastian J. and Leszczynska, Monika and Cromwell, Erich, More than the Money: Payoff-Irrelevant Terms in Relational Contracts. IZA Discussion Paper No. 11712. Available at SSRN: https://ssrn.com/abstract=3234235

Sebastian J. Goerg

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States
+1 (850) 644-7083 (Phone)

HOME PAGE: http://www.s-goerg.de

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

HOME PAGE: http://www.coll.mpg.de

Monika Leszczynska

New York University School of Law

Erich Cromwell (Contact Author)

Government of the United States of America - Equal Employment Opportunity Commission ( email )

1801 L Street N.W.
Washington, DC 20507
United States

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