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Promises & Partnership

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We examine, experimentally and theoretically, how communication within a partnership may mitigate the problem (highlighted in contract theory) of hidden action. What is the form and content of the communication? Which model of decision-making can capture the impact of communication? We consider free-form communication, measure beliefs (about actions and beliefs), and examine which motivational forces influence subjects. We find they harbor belief-dependent preferences that can be captured using psychological game theory. In particular, agents are influenced by guilt aversion, which suggests a theory of why and how communication influences behavior in which statements of intent and resulting expectations play a special role. This has bearing on how to understand partnerships and contracts.

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  • Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:2003_0003
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    More about this item

    Keywords

    Promises; partnership; contract theory; behavioral economics; hidden action; moral hazard; lies; social preferences; psychological game theory; guilt aversion; reciprocity; fairness;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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