To Communicate or Not? Interfirm Communication in Collaborative Projects

Interfirm innovation projects often require tight collaboration among firms with complementary skills and resources. The success of such projects depends on all firms generating high-quality outputs, which can be difficult to attain for aspects of quality that are not easily observable or contractible. We consider a setting with a focal firm and its collaborating firm (henceforth, the collaborator) engaging in a joint project, in which they make their quality decisions over time, respectively, and study the firm’s decision to communicate its quality output progress to its collaborator voluntarily. We first develop normative predictions using game-theoretic models by analyzing a reporting (respectively, revealing) case, in which the firm can report a not necessarily truthful quality (the truthful quality) to the collaborator. We find that the firm should be indifferent between reporting and not reporting for all project values and should be indifferent between revealing and not revealing (prefer revealing) for high (low) project values. To test this prediction, we run an experiment following a 2 × 3 design, varying the project value (high and low) and the form of communication (no communication, reporting, and revealing). We find that the quality provision is significantly lower than the normative prediction in all treatments. When the project value is high, the decision to report is beneficial to the firm (regardless of the reported quality) because the decision signals the firm’s intention to contribute high quality. The decision to reveal is also beneficial for a firm; however, a different mechanism is at play in this case. The decision itself does not directly affect the quality provisions, but the revealed quality does as the collaborator waits to observe the truthful revealed quality and incorporates this information in choosing a quality later. By contrast, when the project value is low, neither reporting nor revealing are beneficial for a firm. In particular, the decision to report no longer acts as a positive signal as it is used by firms trying to deceive the collaborator and get an advantage.