Cooperation and Mistrust in Relational Contracts

Work and trade relationships are often governed by relational contracts, in which incentives for cooperative action today stem from the prospective future benefits of the relationship. In this paper, we study how a lack of hard information about the costs of providing quality, and therefore about the financial consequences of actions, affects relational contracts in buyer-seller relationships. The absence of verifiable information can impede the joint understanding of what constitutes cooperative behavior, and may thus inject mistrust into relationships. Comparing seller-buyer relationships with hard (verifiable) and soft (non-verifiable) information about seller costs in the laboratory, we find that soft information affects the terms of relational contracts. Contractual terms are adjusted to the detriment of the uniformed party. However, the uniformed party does not reciprocate these adjustments with efficiency-reducing actions. We therefore find that asymmetric information only affects the distribution of rents, and not efficiency