Determinants of Relational Contract Performance: Experimental Evidence

• Agricultural Economics Workshop

Date and Location

Thursday, January 20, 2022, 4:10 PM - 3:30 PM
Online Meeting, Zoom

Abstract

In simple repeated games, the size of the discount factor has been shown to be a primary driver of cooperation. However, relational contracts differ in that the game structure can be endogenous due to the endogeneity of contractual form. It is therefore useful to understand the channels through which the discount factor influences cooperation in relational contracts. According to theory, a cooperative equilibrium requires contracts to obey participation and self-enforcement constraints to ensure that honoring obligations are mutual best-responses. I find that, consistent with theory, a higher discount factor has only tenuous direct effects on performance but unambiguously increases the number of contracts that obey self-enforcement and participation constraints. More- over, contracts that obey constraints robustly improve performance. However, further disaggregation of the data reveals that contracts that obey constraints robustly improve performance only in the absence of prior cooperation. In the presence of prior cooperation, other factors such as the share of surplus promised to agents, may be more important.