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Putting relational contract theory to the test: experimental evidence

Published online by Cambridge University Press:  14 March 2025

Nisvan Erkal ,
Steven Y. Wu Open the ORCID record for Steven Y. Wu [Opens in a new window]  and
Brian E. Roe
Nisvan Erkal*
Affiliation:
Department of Economics, University of Melbourne, 111 Barry Street, Carlton, Victoria 3010, Australia
Steven Y. Wu*
Affiliation:
Department of Agricultural Economics, Purdue University, Krannert Building, 403 West State Street, West Lafayette, IN 47907, USA
Brian E. Roe*
Affiliation:
Department of Agricultural, Environmental and Development Economics, Ohio State University, 225 Agricultural Administration Building, 2120 Fyffe Road, Columbus, Ohio 43210, USA
*
n.erkal@unimelb.edu.au
sywu@purdue.edu
roe.30@osu.edu
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Abstract

We investigate a number of canonical predictions that arise from relational contract theory. Employing an experimental design with endogenous choice of contract type, we find considerable experimental support for several well-established predictions, including the importance of self-enforcement and individual rationality constraints for contractual performance; a preference for informal agreements when third-party verification of performance is coarse; and a tendency toward strategic ambiguity (Bernheim and Whinston Am Econ Rev 88(4):902–932, 1998). However, two findings that appear to be inconsistent with theory are that (1) contractually specified performance levels do not appear to respond to the discount factor though realized performance does; and (2) subjects often apply inefficient punishments following a deviation. By providing evidence on the strengths and weaknesses of standard relational contract theory, our study shows where there is room for improvement. We conjecture that incorporating social preferences and semi-grim strategies (Breitmoser Am Econ Rev 105(9):2882–2910, 2015) can potentially address the observed weaknesses.

Keywords

Relational contractsRepeated transactionExplicit incentivesStrategic ambiguityExperiments

JEL classification

D86: Economics of Contract: Theory J41: Labor Contracts C91: Laboratory, Individual Behavior M52: Compensation and Compensation Methods and Their Effects C73: Stochastic and Dynamic Games • Evolutionary Games • Repeated Games L14: Transactional Relationships • Contracts and Reputation • Networks L24: Contracting Out • Joint Ventures • Technology Licensing
Type
Original Paper
Information
Experimental Economics , Volume 25 , Issue 1 , February 2022 , pp. 111 - 139
Copyright
Copyright © 2021 Economic Science Association

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Footnotes

Supplementary file 1 (PDF 900 kb)Supplementary file 2 (PDF 1664 kb)Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s10683-021-09707-w.

Supplementary Information The online version contains supplementary material available at https://doi.org/10.1007/s10683-021-09707-w.

A correction to this article is available online at https://doi.org/10.1007/s10683-021-09712-z.

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