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Can Relational Contracts Survive Stochastic Interruptions?

Linardi, Sera and Camerer, Colin F. (2010) Can Relational Contracts Survive Stochastic Interruptions? Social Science Working Paper, 1340. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper investigates the robustness of the “two-tiered labor market” experimental results of Brown, Falk and Fehr (2004) by subjecting relationships to stochastic interruptions. Using two different subject pools, we first replicate the basic pattern of high quality private contracting and low quality public contracting. We then study the impact of exogenous random ‘downturns’ in which firms cannot hire workers for three periods. Our hypothesis is that 1. job rents are lower in downturns 2. this will lower wages and effort, unless strong re-connection norms exist. We do find that job rents are lower, but surprisingly, the downturns do not harm aggregate market efficiency. Stochastic interruptions delay the formation of relationships, necessitating the use of public offers, which increases the competitiveness of the short term market. The high tier (private) markets responds by raising wages, thus increasing average worker surplus per trade. We also find evidence that 50-50 pre-downturn worker-firm surplus sharing predicts post-downturn re-connections.

Item Type:Report or Paper (Working Paper)
Camerer, Colin F.0000-0003-4049-1871
Additional Information:We would like to thank participants of 4th IZA Behavioral Labor Workshop (October 16-18, 2008, Bonn), ESA 2008, Jean-Laurent Rosenthal, Martin Brown and Christian Zehnder.
Group:Social Science Working Papers
Subject Keywords:experiments, labor, contracting, organizational design
Series Name:Social Science Working Paper
Issue or Number:1340
Classification Code:JEL: D64, C90, L30
Record Number:CaltechAUTHORS:20170726-134336781
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79428
Deposited By: Jacquelyn Bussone
Deposited On:07 Aug 2017 21:33
Last Modified:03 Oct 2019 18:19

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