Article thumbnail
Location of Repository

Social Preferences and Relational Contracting Performance: An Experimental Investigation

By Brian Roe and Steven Y. Wu


We examine how social preferences affect behavior and surplus in relational contracts. Experimental subjects participate in a contracting environment similar to Brown, Falk, and Fehr [Brown, M., Falk, A. & Fehr, E., “Relational Contracts and the Nature of Market Interactions, Econometrica, 72 (2004):747-780] and in social preference experiments adapted from Charness and Rabin [Charness, G. & Rabin, M. “Understanding Social Preferences with Simple Tests.” The Quarterly Journal of Economics 117(2002): 817-869]. Subjects’ behavior during the Charness and Rabin experiment is a significant predictor of behavior and outcomes observed during the subsequent multi-period, finite-horizon, relational- contracting environment, which features market power, unenforceable performance, reputation formation and endogenous matching of trading partners. Compared to subjects who respond to the Charness-Rabin games in a fashion consistent with purely self-interested, competitive or reciprocal social preferences, buyers and sellers with alternative social preference structures engage in contracts with substantially higher quality and price, which leads to greater surplus for both parties. A key difference is that self-interested, competitive and reciprocal buyers respond to early-period shirking by extending subsequent offers that are less generous to the seller, while buyers with other social preferences extend subsequent offers that are more generous. Reciprocal and competitive sellers and, to a lesser extent, self-interested sellers, deliver sub-contractual levels of quality more often, which substantially lowers buyer and total welfare. We conclude that intentional or ‘cold’ measures of social preferences have considerable predictive power in dynamic, interactive (or ‘hot’) economic settings.Contracts; relational contracts; implicit contracts; market interaction; experimental economics; repeated transaction; social preferences.

OAI identifier:

Suggested articles


  1. (1999). A Theory of Fairness,
  2. (2004). A Theory of Sequential Reciprocity.” Games and Economic Behavior,
  3. (2006). A Within-Subject Analysis of Other-Regarding Preferences.” Working paper, Royal Holloway,
  4. (1991). Are Economists Different, and If So,
  5. (2004). Attribution and Reciprocity in an Experimental Labor Market.”
  6. (2005). Beyond Outcomes: Measuring Procedural Utility.” Oxford Economic Papers,
  7. (2004). Do Labour Market Conditions Affect Gift Exchange?
  8. (1993). Does Fairness Prevent Market Clearing? An Experimental Investigation.”
  9. (2002). Equity, and Reciprocity in a Gift-exchange Experiment: An Encompassing Approach.” Games and Economic Behavior,
  10. (2005). Fair Procedures: Evidence from
  11. Fairness and Incentives in a Multi-task Principal-agent Model.”
  12. (2005). Fairness in
  13. (1998). Gift Exchange and Reciprocity
  14. (2000). Hot versus Cold: Sequential Responses and Preference Stability
  15. (2004). How to Identify Trust and Reciprocity.” Games and Economic Behavior,
  16. (2000). Incentives and Contractual Choices.” European Economic Review.
  17. (1996). Involuntary Unemployment and Noncompensating Wage Differentials
  18. (2002). Partial Gift-exchange in an Experimental Labor Market: Impact of Subject Population Differences, Productivity Differences, and Effort Requests on
  19. Rational Cooperation in the Finitely Repeated Presoners’
  20. (1997). Reciprocity as a Contract Enforcement Device.” Econometrica,
  21. (2004). Selfish and Male: Field Evidence of
  22. (2004). Sequential Decision and Strategy Vector Methods in Ultimatum Bargaining:
  23. (1998). Social Influence in the Sequential Dictator Game.”
  24. (2006). The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in
  25. (1999). The Disjunction Effect and Reason-based Choice
  26. (2001). The Relevance of Equal Splits
  27. (1992). Thinking through Uncertainty: Nonconsequentialist Reasoning and Choice.” Cognitive Psychology,
  28. (2002). Understanding Social Preferences with Simple Tests.”
  29. (1999). Wage Rigidity in a Competitive Incomplete Contract
  30. (2003). What Do Bargainers’ Preferences Look Like? Experiments with a Convex Ultimatum Game.” American Economic Review,
  31. (1998). When Social Norms Overpower Competition:
  32. (2001). Which is the Fair Sex? Gender Differences in Altruism.”
  33. (2002). Why Social Preferences Matter –

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.