TY  - RPRT
        AU  - Brown, Martin
AU  - Falk, Armin
AU  - Fehr, Ernst
        TI  - Relational Contracts and the Nature of Market Interactions
        PY  - 2003/Oct/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 897
        UR  - https://www.iza.org/publications/dp897
        AB  - We provide evidence that long-term relationships between trading parties emerge
endogenously in the absence of third party enforcement of contracts and are associated with
a fundamental change in the nature of market interactions. Without third party enforcement,
the vast majority of trades are initiated with private offers and the parties share the gains from
trade equally. Low effort or bad quality is penalized by the termination of the relationship,
wielding a powerful effect on contract enforcement. Successful long-term relations exhibit
generous rent sharing and high effort (quality) from the very beginning of the relationship. In
the absence of third-party enforcement, markets resemble a collection of bilateral trading
islands rather than a competitive market. If contracts are third party enforceable, rent sharing
and long-term relations are absent and the vast majority of trades are initiated with public
offers. Most trades take place in one-shot transactions and the contracting parties are
indifferent with regard to the identity of their trading partner.
        KW  - fairness preferences
KW  - repeated transaction
KW  - involuntary unemployment
KW  - market interaction
KW  - implicit contracts
KW  - relational contracts
        ER  -