Empowering Weak Parties Boosts Cooperation but Reduces Efficiency in Relational Contracts
The experiment in the article explores the effects of changing bargaining power in business deals. When sellers have more say and contracts are not fully enforced, most deals focus on fixed pay instead of rewards for good work. Sellers make more money if they have the upper hand in negotiations. But for sellers to earn extra cash, part of the agreement must be enforced by someone else. Contracts where no outsider enforces anything lead to better teamwork and higher quality work. Even though sellers earn less, everyone benefits more, and agreements are more successful. This shows that boosting weaker sides in deals can have big effects on how well contracts work out in places where rules are weak.