Let Them Choose! Economically Equivalent Terms Lead to Different Behavior by Revealing the Offeror’s Intentions

Abstract

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, contractual parties 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 contract instead of an open-ended one is perceived as unkind and results in lower performance. We show that this observed difference is not a matter of sorting but a direct response to the contract type. Our results demonstrate that contractual behavior might be affected by the choice between economically equivalent terms because it reveals the offeror's intentions.

Keywords: relational contract, reciprocity, trust

JEL Classification: C92, K12