Experimental Analysis of Endogenous Institutional Choice: Constantly Revealing Versus Ad-Hoc Contracting

28 Pages Posted: 8 Nov 2021

See all articles by Daniela Teresa di Cagno

Daniela Teresa di Cagno

LUISS Guido Carli

Lorenzo Ferrari

University of Rome Tor Vergata - Department of Economics and Finance

Werner Güth

Max Planck Institute for Research on Collective Goods; Luiss Guido Carli University

Vittorio Larocca

Luiss Guido Carli University

Date Written: November 5, 2021

Abstract

Ad-hoc contracting allows to quickly react to changes which could be neglected or noticed too late in case of constant contracting. But always deciding anew, e.g., how much and what to order in commercial and what to buy in private life, is too cumbersome. To capture the cognitive burden of ad-hoc contracting and how it can be avoided by constant contracting, our setup confronts ad-hoc pricing, which is non-revealing, with constantly revealing pricing. The experiment modifies the Acquiring-a-Company game by reversing the responsibility for pricing to the seller who proposes a price together with a cheap-talk value message in case of ad-hoc pricing and, in case of constantly revealing contracting the seller demands a constant surplus share for all periodic interactions. The experiment lets sellers decide between constantly revealing prices and ad-hoc non-revealing prices. Buyers, either aware of the seller’s surplus share or only of the periodic value message and price, can accept or reject trade in each of several successive periods played by the same pair, a seller and a buyer participant. Will sellers opt for constant pricing already without experience or ad-hoc pricing? And will one, when more experienced, opt for what has been more profitable?

Keywords: Bargaining, Experiment, Complete and Incomplete Information

JEL Classification: C73, C92, D82, D90

Suggested Citation

di Cagno, Daniela Teresa and Ferrari, Lorenzo and Güth, Werner and Larocca, Vittorio, Experimental Analysis of Endogenous Institutional Choice: Constantly Revealing Versus Ad-Hoc Contracting (November 5, 2021). CEIS Working Paper No. 523, Available at SSRN: https://ssrn.com/abstract=3957186 or http://dx.doi.org/10.2139/ssrn.3957186

Daniela Teresa Di Cagno

LUISS Guido Carli ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Lorenzo Ferrari

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Rome
Italy

Werner Güth

Max Planck Institute for Research on Collective Goods

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

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Vittorio Larocca (Contact Author)

Luiss Guido Carli University ( email )

Rome
Italy

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