Is investing in communication worth it? An experimental study of communication in a relational contract setting

Many markets include communication forums (e.g. Angie's List for services, Yelp for restaurants) to facilitate trading between buyers and sellers. Some market-makers go beyond creating forums and make investments to improve the quality of communication platforms, such as by recruiting “elite” yelp members or Amazon Vine Program reviewers, in order to introduce more truthful reviews. We conduct an experiment in order to examine who benefits from providing communication forums and under what conditions should a market-maker invest in better communication. When third-party enforcement for quality is unavailable, theory predicts that communication will be especially important to facilitate reputation incentives to substitute for lack of contract enforceability. In our control treatment, buyers and sellers trade using imperfectly enforced contracts with no communication between the parties. Then we introduce two treatments with structured communication where subjects can endogenously choose to send pre-selected messages about their transaction (e.g. “the seller did not deliver desired quality”). We allow for two different types of communication: (a) send any pre-selected message regardless of trading outcomes, or (b) only send truthful messages. Our results show that compared to the control treatment, the addition of unverified communication does not have a significant impact on efficiency or social surplus, perhaps due to seller dishonesty in the communication system. Income distribution becomes more equitable, however, suggesting that unverified communication is an overall beneficial tool for development. We also find that there is much to gain from investments in improving communication over simply providing an opportunity for communication. Verifiable communication yields large increases in efficiency, and social surplus. It also alleviates, albeit mildly, income inequalities between buyers and sellers.