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

Abstract

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. 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.