Relational Contracts and the Nature of Market Interactions

By Martin Brown, Armin Falk, Ernst Fehr. Social Science Research Network, 2004

533 citations recorded by the source corpus.

We provide evidence that long-term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are initiated with private offers and the parties share the gains from trade equally. Low effort or bad quality is penalized by the termination of the relationship, wielding a powerful effect on contract enforcement. Successful long-term relations exhibit generous rent sharing and high effort (quality) from the very beginning of the relationship. In the absence of third-party enforcement, markets resemble a collection of bilateral trading islands rather than a competitive market. If contracts are third party enforceable, rent sharing and long-term relations are absent and the vast majority of trades are initiated with public offers. Most trades take place in one-shot transactions and the contracting parties are indifferent with regard to the identity of their trading partner.

Subfields: Accounting, Economics and Econometrics, Safety Research

View Paper: https://www.semanticscholar.org/paper/741bdacdf4869c2ea341568eb89983a0fefe9dbc

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Citations in the corpus

Relational Incentive Contracts (2003, background): “Especially relevant here is Brown et al. (2004) in which the party acting in the role of purchaser could specify a payment corresponding to pt and a performance level corresponding to qt.”
Economic Networks in the Laboratory: A Survey (2004, result): “It is illuminating to compare this finding to a recent experiment by Brown, Falk, and Fehr (2002) , who do not study network formation explicitly, but allow subjects to form bilateral relations in a two-person incomplete contract setting.”
Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence (2012, background): “…argument in the literature holds that sorting mechanisms are important when skills are heterogeneous, a number of studies have examined how incentives interact with social preferences to influence employee performance and sorting (e.g. Fehr and Falk 1999; Fehr and Gächter 2002; Brown et al. 2004).”
The Currency of Reciprocity - Gift-Exchange in the Workplace (2012, unknown): “(1983) Webley andWilson (1989) and Burgoyne and Routh (1991)).”
The hidden advantage of delegation: pareto-improvements in a gift-exchange game (2012, background): “Fehr, Ernst and Simon Gächter.”
The nature of human altruism (2003, background): “Recent experiments indicate that endogenous partner choice and the associated incentives for reputation formation have powerful effects on human cooperation 57 .”
Homo Reciprocans: Survey Evidence on Behavioural Outcomes (2008, background): “Positive reciprocity has been demonstrated in experimental settings where contracts are incomplete and workers reciprocate generous wages with high effort, even though there is no way to enforce contracts (Fehr et al., 1993; Brown et al., 2004).”
A Behavioral Account of the Labor Market: The Role of Fairness Concerns (2008, background): “In a finitely repeated context, the presence of even a small fraction of fair-minded workers may also motivate purely selfish workers to exert effort in response to receiving a wage rent (Brown et al 2004; 2008; Kreps et al 1982).”
Credit Reporting, Relationship Banking, and Loan Repayment (2007, unknown): “Experimental studies (Brown et al., 2004; Fehr and Zehnder, 2005) also confirm that long-term relationships are a powerful disciplinary device.”
Reputation Formation and the Evolution of Cooperation in Anonymous Online Markets (2014, unknown): “More-over, because online trade takes place across large geographic distances, offline commitment relations (Brown, Falk, and Fehr 2004; Kollock 1994; Yamagishi, Cook, and Watabe 1998) or trust networks (Cook, Rice, and Gerbasi 2004; DiMaggio and Louch 1998), which would allow traders to obtain and…”
Other Regarding Preferences: A Selective Survey of Experimental Results (2012, background): “Brown, Falk and Fehr (2004) introduce the possibility of longer term relations between firms and workers.”
On the Economics and Biology of Trust (2009, background): “They enabled both the analysis of the impact of institutions on trust (e.g., Kollock 1994; Bohnet and Huck 2004; Brown, Falk, and Fehr 2004) and cross-national comparisons of trust (LaPorta et al. 1997; Yamagishi, Cook, and Watabe 1998; Buchan, Croson, and Dawes 2002; Naef et al. 2008).”