When Talking Doesn’t Help: On the Limits of Communication and the Value of Simple Contracts

Micro Seminar
Christian Zehnder
Friday 29 Sep 2023, 15:30 - 16:45
Mandeville Building
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Communication is a lubricant for economic exchange: trading partners who talk reach higher levels of cooperation, coordinate on better outcomes, and are more likely to avoid conflicts. However, these efficiency-enhancing effects of communication do not unfold in all settings.

(joint work with Ernst Fehr and Oliver Hart)

In this study we explore a competitive contracting environment that creates considerable payoff inequality. Inefficient outcomes emerge, because parties who end up with little surplus tend to engage in counterproductive behavior. Communication does not improve efficiency, because the disadvantaged parties predominantly (ab)use the communication technology for influence activities. These attempts to obtain more surplus further increase the potential for conflicts, because influencing failures trigger even harsher responses to unequal payoffs.

We find that trading parties minimize conflicts and maximize profits if they choose a simple (and rigid) contract and refuse to communicate

About Christian

Christian Zehnder’s research is in the fields of organizational and behavioral economics and comprises laboratory experiments, field experiments, and game-theoretic models.


If you would like to book a bilateral, join for lunch or dinner on Friday evening, please send an email to dur@ese.eur.nl .

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