Building an Equilibrium: Rules vs. Principles in Relational Contracts

Effective collaboration within and between organizations requires efficient adaptation to unforeseen change. We study how parties build relational contracts that achieve this goal. focus on the “clarity problem”—whether have a shared understanding of promises they make each other. Specifically, (a) buyer seller play trading game in several periods; (b) know their environment will change but do not how; (c) before any occurs, can reach nonbinding agreement about entire game. hypothesize pairs whose initial defines broad principle rather than narrow rule are more successful solving clarity problem achieving after In our baseline condition, we indeed observe who articulate principles significantly higher performance occurred. Underlying correlation, also find with principle-based agreements were likely both expect take actions consistent what prescribed. To investigate causal link performance, implement “nudge” intervention induces principles. The succeeds coordinating quality immediately change, it fails coordinate expectations price, ultimately leading conflicts preventing an increase long-run shock. Our results suggest (1) may improve organizational (2) high-performing be difficult build.