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Can Relational Contracts Survive Stochastic Interruptions? Experimental Evidence

Author

Listed:
  • Colin Camerer

    (Division of Humanities and Social Sciences, California Institute of Technology)

  • Sera Linardi

    (Graduate School of Public and International Affairs (GSPIA), University of Pittsburgh
    Department of Economics, University of Pittsburgh)

Abstract

This paper tests the robustness of the "two-tiered market" in which efficient bilateral contracts emerge between firms and workers (Brown, Falk and Fehr, 2004). Our experiment introduces stochastic interruptions in firms' ability to offer contracts. Involuntarily laid off workers are eager to be reemployed; they are not selective about job offers and do not shirk. Firms' preference for these "temp workers" induces all workers to compete harder to enter relational contracts. Wages in low-tier markets rise dramatically, suggesting the stigma of unemployment is removed. The results show that interruptions may shorten relational contracts without harming market efficiency.

Suggested Citation

  • Colin Camerer & Sera Linardi, 2010. "Can Relational Contracts Survive Stochastic Interruptions? Experimental Evidence," Working Paper 483, Department of Economics, University of Pittsburgh, revised Mar 2012.
    • Handle: RePEc:pit:wpaper:483
    as

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    File URL: https://www.hss.caltech.edu/SSPapers/sswp1340.pdf
    File Function: First version, 2010
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    File URL: https://www.linardi.gspia.pitt.edu/wp-content/uploads/2012/03/RelationalContracting_CamererLinardi.pdf
    File Function: Revised version, 2012
    Download Restriction: no
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    References listed on IDEAS

    as
    1. Martin Brown & Armin Falk & Ernst Fehr, 2012. "Competition And Relational Contracts: The Role Of Unemployment As A Disciplinary Device," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 887-907, August.
    2. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Herz, Holger & Schmutzler, Armin & Volk, André, 2019. "Cooperation and mistrust in relational contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 366-380.
    2. Nora Vogt, 2015. "Environmental Risk Negatively Impacts Trust and Reciprocity in Conservation Contracts: Evidence from a Laboratory Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(3), pages 417-431, November.
    3. Englmaier, Florian & Segal, Carmit, 2016. "Morale, Relationships, and Wages: An Experimental Study," VfS Annual Conference 2016 (Augsburg): Demographic Change 145662, Verein für Socialpolitik / German Economic Association.
    4. Gerhards, Leonie & Heinz, Matthias, 2017. "In good times and bad – Reciprocal behavior at the workplace in times of economic crises," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 228-239.
    5. Jed DeVaro & Jin-Hyuk Kim & Nick Vikander, 2014. "Pay-for-(Persistent)-Luck: CEO Bonuses Under Relational and Formal Contracting," Discussion Papers 14-13, University of Copenhagen. Department of Economics.

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    More about this item

    Keywords

    experiments; labor market; relational contracts; organizational design; layoffs;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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