Electronic copy available at: http://ssrn.com/abstract=1872569

1

The relational costs of complete contracts

Eileen Y. Chou,

(e-chou@kellogg.northwestern.edu)

Nir Halevy,

(Halevy_Nir@GSB.Stanford.edu)

&

J. Keith Murnighan

(keithm@kellogg.northwestern.edu)

Paper Presented at the

24rd Annual International Association of Conflict Management Conference

Istanbul, Turkey

July 3 – 6, 2011

Electronic copy available at: http://ssrn.com/abstract=1872569

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Abstract

Although contracts provide safeguards against risk, they can also signal low expectations for a

relationship (e.g., suggesting a prenuptial agreement.) Three studies document how attempts to

create more complete contracts, driven by a desire to effectively manage the potential pitfalls in a

relationship, can crowd out rapport and undermine trust and cooperation. More specifically, this

paper investigates the signaling effects of two aspects of contract completeness, specificity and the

number of clauses in the contract. We found that complete contracts act as a signal (Study 1) and

reduce relational expectations, subjective satisfaction, and trust (Study 2); they also lead to less

cooperative behavior (Study 3). We discuss some of the implications of this paradox.

Abstract word count: 114

Electronic copy available at: http://ssrn.com/abstract=1872569

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We have all experienced them: the speedy, virtually incomprehensible dialogues that reveal

obscure late fees and unexpected costs at the end of what seemed like a good deal; the pages of

inscrutable legalese that accompany our phone, mortgage, and insurance contracts; and the

seemingly endless fine print that seems to be everywhere, from boarding passes to the rules of an

enticing auction. Contracts are a common element in everyday life; they accompany big purchases

(e.g., property) and everyday essentials (e.g., paying for parking), and they typically include all

sorts of confusing details. Analyses of 1,200 credit card agreements in the US, for instance, have

shown that their contracts contain an average of 3,771 words, almost as many as the U.S.

constitution (4,018), topping out at 10,287 (Prater, 2010). Thus, it is not surprising that people

dislike contracts: in 2010, fine print to a contract was chosen to be one of the 12 things that the

world can do without (Warren, 2010).

The irony, of course, is that many of the underlying goals of a contract are positive, e.g., to

reduce risk, uncertainty, and ambiguity (Williamson, 1991; Yamagishi, 1988). Thus, theory and

research have often investigated the design of optimal contracts (e.g., Hart & Holmstrom, 1988;

Herold, 2010; Lorenz, 1999; Williamson, 1985) and their psychological implications (Anderson &

Dekker, 2005; Malhotra & Murnighan, 2002; Mulder, van Dijk, De Cremer, & Wilke, 2006;

Tenbrunsel & Messick, 1999). Less research has addressed the effects of the process of reaching a

contract (Macauley, 1985) and the impact of its characteristics (Lumineau & Malhotra, 2010;

Tirole, 1999) on the parties’ subsequent interactions and performance.

Thus, the current paper focuses directly on these issues, investigating the influence of the

contracting process and the details of a contract on the contracting parties’ subsequent expectations

and their relationship. We focus on how the contract development process influences the parties’

conceptualizations and realizations of their future relationship. In particular, we suggest that the

process gives the parties repeated opportunities to send implicit signals that can inadvertently

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damage their future relationship. Even though both parties may see a contract as a way to increase

their security, achieving that security may, paradoxically, alter their subsequent feelings and

actions in unexpected and often unfortunate ways. More specifically, we focus on the effects of the

implicit signals that are often embedded within the language and the details of the contracting

process (Skyrms, 2010).

People who have a strictly business relationship, who see their interactions as arms-length

exchanges (e.g., Uzzi, 1997), tend to require more complete contracts to align their interests and

diminish coordination problems (e.g., Sitkin & Roth 1993). In contrast, people who have a more

communal, personal relationship often have less serious concerns about the nature and the details

of their contracts because they may have already established many mutual, tacit understandings

(Uzzi, 1997). The complexity and length of the contracting process, along with its business and

legal associations (Macneil, 1978), however, gives the parties many opportunities to send implicit

signals that they don’t intend. Whenever either party suggests that they add more detail or another

clause, for instance, they implicitly convey a view of their relationship that is more business-like

and less personal. Each of these suggestions also signals that a party is worried about their own

risks – more than they are worried about the relationship. Thus, although the process of

formulating a contract can effectively manage some of the potential pitfalls in a future relationship,

it can also, paradoxically, crowd out rapport and undermine trust and cooperation.

The process of contract development

Formally defined as “an agreement between two or more competent parties in which an

offer is made and accepted, and each party benefits,” (Lectric Law Library), a contract1 can be as

simple as a verbal proposal followed by immediate agreement, without contingencies or lengthy

interchange, or as complex as a long series of “if …, then …” statements that specify a host of

potential contingencies and their resolutions. We define contracts as more complete when they

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place increasing restrictions on the parties’ actions (e.g. Bernheim & Whinston, 1998; Herold,

2010; Tirole 1999). In the current research, we focus on two elements that contribute to a

contract’s completeness: the specificity of its language and the number of clauses it contains.

We propose that, as contracts become more complete (i.e., more specific, with more

clauses, or both), they will have increasingly damaging effects on the parties’ post-contract

relationship. Thus, when the parties’ interpersonal relationship is important, we expect that less

rather than more complete contracts will give them greater long- and short-run benefits. Although

the formal, explicit aspects of a contract can help to alleviate uncertainty, we predict that adding

elements or detail to a contract will signal distrust and damage the parties’ interpersonal

relationship. We investigate these predictions in three studies.

Contracts reduce risk

People have a strong, natural need for structure, certainty, predictability, and control

(Hogg, 2007; Kruglanski & Webster, 1996; Whitson & Galisnky, 2008). Because they also tend to

be risk-averse (Kahneman & Tversky, 1979), individuals often endorse and rely on formal

arrangements to reduce uncertainty and promote structure and control. These include authority

structures, social and organizational hierarchies (e.g., Fiske, 2010; Gruenfeld & Tiedens, 2010;

Halevy, Chou, & Galinsky, 2010; Magee & Galinsky, 2008; Weber, 1978), rules and regulations

(e.g., Williamson, 1991), and contracts (e.g., Malhotra & Murnighan, 2002; Williamson, 1985).

Thus, for many reasons, it is natural that people value complete contracts. First, they guard

against unexpected events. Landlords and tenants, for instance, sign rental agreements so that both

know what to expect of each other; and importers often sign forward contracts to lock in a stable

exchange rate rather than allowing it to float (Eun & Resnick, 1988). Second, and more

interestingly from our perspective, contracts reduce interpersonal risk by specifying the terms that

govern and regulate a relationship.2 In fact, when given the choice between imposing a complete or

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less complete contract, more than 70% of the people chose the former (Chou, Halevy, &

Murnighan, 2010). When an essential part of what is being contracted is relational, however, the

process that is required to achieve these goals works against some of the participants’ ultimate

desires.

The Inefficiency of Complete Contracts

Contract theory, which focuses on “incentives, information, and economic institutions”

(Bolton & Dewatripont, 2005, p. 2), identifies four reasons why not all contracts are complete; all

four focus on costs and economic inefficiencies. First, because contract proposers are boundedly

rational, they cannot easily predict all of the possible contingencies that can arise (Simon, 1981).

Thus, constructing a truly complete contract is impossible. Second, because contracts incur

transaction costs both before (contract drafting) and after (contract monitoring) completion

(Williamson 1975; 1985), the parties may choose to reduce costs and not include some elements

that would otherwise make their contract more complete (Crocker & Reynolds, 1993). Third, a

complete contract imposes constraints that can reduce the parties’ future action options3 (Jeffries &

Reed, 2000; Lorenz, 1999; Macneil, 1978). Finally, because the parties may prefer to keep

information about their interests and preferences private (e.g., Spier, 1992), they may refrain from

suggesting terms that might reveal their true preferences and their strategic, long-term plans. Thus,

even though contract theory provides many reasons for creating a contract, it also identifies several

reasons why a complete contract may not be optimal.

In addition to economic inefficiency and strategic rigidity, we propose that complete

contracts also damage interpersonal relationships. In business relationships, the parties’ earliest

interactions may revolve around creating their first contract. Even if they have a wealth of

information about each other, the process can easily become contentious and adversarial, resulting

in strong and potentially negative first impressions (Anderson, 1965; Srull & Wyer, 1989). Also,

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because people have difficulty ignoring information once they have acquired it (e.g., Camerer,

Loewenstein, & Weber, 1989; Galinsky & Mussweiler, 2001), discounting or revising first

impressions can be particularly difficult.4 Thus, the contracting process can often be a rich, potent

context for interpersonal information, for both parties, and it is unlikely that it will all be positive.

Contracting and Egocentrism

When people begin the contracting process, a natural self-focus (Gilovich, Medvc, &

Savitsky, 2000) leads them to primarily consider their own benefits and their own risks, e.g.,

“What am I getting into here? What are the likely outcomes, and how will they affect me?” When

both parties to a contract are egocentric – a common orientation (Ross & Sicoly, 1979) – and they

both focus more on their own benefits and risks (Malhotra, 2004), they are likely to suggest

contingencies to a contract that will reduce their risks and increase their benefits. People naturally

see their own concerns as legitimate and others’ behaviors as reflections of their traits and

intentions (Ross, 1977). This can lead people to interpret their counterpart’s suggestions for more

complete contracts as an indicator of a distrustful disposition, and this tendency can be exacerbated

by the fixed-pie bias, in which people believe that all of their counterpart’s gains mean equivalent

losses for them (Thompson & Hastie, 1990).

Thus, while people often interpret additional clauses to a contract that they have proposed

themselves as precautionary measures, they are likely to view similar suggestions from their

counterparts with suspicion, fear, and concerns about the presence of hidden agendas (Greenwald

& Stiglitz, 1987; Ross & Stillinger, 1991), even when the suggestion is mutually beneficial. Thus,

Herold’s (2010) mathematical model and our signaling analysis of the contracting process both

suggest that pushing for a more complete contract can create distrust and that, conversely, pushing

for a less complete contract can build trust, which is particularly important when the parties’

future, interpersonal relationship can contribute to their achievement of positive task outcomes.

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Contract Completeness and Cooperation

From a theoretical perspective, more complete, more specific contracts should provide a

stronger alignment of the parties’ outcome expectations, decrease their potential

misunderstandings, and, as a result, increase mutual cooperation (Sitkin, 1995). The presence of a

formal contract, however, can signal to the parties that their counterparts’ cooperative acts are due

to compliance rather than true commitment (Malhotra & Murnighan, 2002; Mulder et al., 2006); in

essence, the parties can both believe that the other’s cooperative behavior is not heartfelt but is,

instead, contractually induced (Kelman, 1961; 2006; Pruitt & Rubin, 1986).

Research does suggest that untrustworthy individuals cooperate strategically and act less

cooperatively when sanctions disappear (Yamagishi, 1988). In addition, Malhotra and Murnighan

(2002) found that people cooperated more without any history of a contract than they did after

removing a binding contract that had generated cooperative behavior. They also concluded that,

during the contractual period, people attributed others’ cooperative behavior to the constraints of

the contract rather than to their counterparts’ benevolence. Thus, even though the parties had been

acting cooperatively, mutual trust did not follow. In addition, these same, previously cooperative

parties cooperated much less when their contract no longer applied: because they felt that their

cooperation was contract-induced, no contract led to less cooperation.

People who work within a contract also tend to overestimate the power of surveillance and

sanctions (Cialdini, 1996), leading them to overestimate a contract’s force as a cooperation-

inducing mechanism. Also, because many people are “conditional cooperators” who will cooperate

only when others have also cooperated (Gintis, 2000; Weber & Murnighan, 2008), they can easily

conclude that other people tend to lack a truly cooperative intent and therefore view contract-

induced cooperation as fragile, unstable, and risky, leading them to refrain from subsequent

cooperation. Thus, suggesting that a contract should be more complete by proposing additional

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contingencies or details can activate a vicious, self-reinforcing cycle (van Lange, Ouwerkerk, &

Tazelaar, 2002) that detonates a cycle of non-cooperative perceptions and behavior.

In sum, we expect that when an essential aspect of the contractual interaction is relational,

drafting a more complete contract will have paradoxically negative effects on people’s perceptions

of their future relationship, their feelings of trust for their counterpart, and the actual cooperation

that they display. Study 1 investigated how complete and incomplete contracts affect subjective

satisfaction and relationship expectations; Study 2 investigated the moderating effects of the

contract proposer’s role; and Study 3 investigated the effects of contract completeness on people’s

subsequent cooperative behavior.

Study 1

Study 1 was designed to assess the effects of contract completeness on the relationship

satisfaction and trust of a business partnership. We predicted that a complete contract would act as

a negative trust signal: the more complete/specific the contract, the less trust that would result in

the contracted partnership and, as a result, the less satisfaction that partners would feel.

Method

Participants

The participants were 70 undergraduates from a Midwestern university (35% male; mean

age = 19.79, SD = 1.94). We made sure that every session had an even number of participants: if

an odd number arrived, the last person to arrive was given a different task. Three participants

expressed suspicion at the end of the study; their responses were excluded from further analyses.

Procedure

Participants drew a colored tag from a box as they entered the lab. After being seated in an

individual cubicle, participants learned that their tag randomly paired them with another participant

and assigned them a role – Member A or Member B. Each pair had two minutes to solve 18 logic

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problems, after which one pair was randomly chosen to receive $1 for every problem that they had

solved correctly.

Partners were not allowed to interact with each other. However, they had an opportunity to

formulate a contract that acted as a written agreement between them, as Member As would create

the contract by choosing five clauses from a list that was only available to them. In reality, we

acted as Member As and manipulated the contract’s form; all of the participants were Member Bs.

Participants read the instructions to the logic problems (reproduced in Appendix A) as they

waited for Member A to create their contract. After a few minutes, they received a handwritten

contract in an opaque envelope and were asked to answer a questionnaire. Half of the participants,

randomly assigned to the specific contract condition, received a contract with specifically worded

clauses (e.g., “both parties will try their best to answer each of the 18 questions with zero errors”).

The other half were randomly assigned to the general contract condition: they received a contract

with generally worded clauses (e.g., “both parties will try their best to answer as many of the

questions correctly as they can”; see Appendix B for all of the specific wording). Thus, the design

was a one-factor, two-level (specific vs. contract) between-subjects design.

The questionnaire asked participants to rate Member A as fair, generous, rational, kind, and

efficient (α = .81) as well as how trusting they thought Member A was [a composite measure that

included ratings of Member A’s perceived benevolence, integrity, competence, and trust; Mayer,

Davis, & Schoorman (1995); α = .77]. Participants also indicated how trusted they felt (“I felt

trusted as I read through the contract that Member A created”), how much the contract reflected

their partner’s view of their interaction, and how competitive they were toward their partner. All of

these responses used 7-point scales (1 = not at all, 7 = very much so). A final question asked

participants to indicate how they would describe their partnership: as an independent task, a

business transaction, or a social partnership (Tenbrunsel & Messick, 1999).

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After working on the logic questions for two minutes, participants indicated how satisfied

they were with the partnership (also on a 7-point scale). Two participants were randomly selected

and paid according to their performance. All of the participants were debriefed, thanked, paid, and

excused.

Results

The participants indicated that they viewed the contract as a signal of Member A’s view of

their interaction, as their ratings were significantly above the midpoint of that item’s scale: (M =

6.24, SD = .82), t(1, 66) = 27.40, p < 0.01. The participants in the specific contract condition also

reported that they were marginally more likely to perceive the contract as a signal than the

participants in the general contract condition (M = 6.41, SD = .70 vs. M = 6.06, SD = .90,

respectively), t(1, 65) = -1.79, p = 0.07. The contract’s wording did not, however, influence

whether they perceived their interaction as an independent task, a business transaction, or a social

partnership or how competitive they were toward their partner (F < 1 for both).

More importantly, participants in the specific contract condition perceived their partner to

be less trusting than participants in the general contract condition (M = 3.99, SD = 1.28 versus M =

4.70, SD = 1.03, F(1, 65) = 6.28, p = .01). Participants who received specific contracts also felt

less trusted than participants who received general contracts (M = 3.12, SD = 1.72 vs. M = 4.03,

SD = 1.38; F(1, 65) = 5.72, p < .05), even though they had never met each other. Finally,

participants who received specific contracts indicated that they liked their partner less than

participants who received general contracts (M = 4.35, SD = 1.25 vs. M = 4.97, SD = 1.13; F(1, 65)

= 4.47, p < .05; see Figure 1).

Bootstrapping mediation analysis (Preacher & Hayes, 2004) also showed that the strength

of the trust signal (i.e., how strongly participants perceived the contract to be a signal) partially

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mediated the effect of contract specificity on how trusted participants felt (95% confidence interval

= -1.20 to -.10; see Figure 2A for the path coefficients). An additional mediation analysis indicated

that, prior to learning the outcomes of the quiz, the more trusted people felt, the more satisfied they

were with their partnership: the feeling of being trusted mediated the effects of contract specificity

on participants’ feelings of satisfaction with their partnership (95% confidence interval = -1.08 to -

.13. see Figure 2B for the path coefficients).

---------Insert Figure 1 and Figure 2 about here-------------

Discussion

Study 1 provided preliminary evidence for the signaling effects of contract specificity.

More specific contracts, with the same number of clauses as more general contracts, were

interpreted as a signal of distrust. People also perceived their partners less positively, felt less

trusted, and consequently derived less satisfaction from their partnership.

It is important to note that the contracts in this study did not include sanctions that, research

indicates, also send an aversive signal (Mulder et al., 2006). Instead, the current findings suggest

that, even without mentioning the potential negative consequences of contract violations, the

specificity of a contract was sufficient for people to perceive it as a negative signal, which

significantly dampened perceptions of trust. This suggests that, as contracts become more

sophisticated and detailed, trust in the relationship may dwindle, also reducing satisfaction.

Study 1, however, included a clear agent: participants’ partners were not responsible for

creating the contract’s clauses but they were responsible for choosing them. Thus, it remains

unclear whether the effects were driven by the fact that their partner proposed a specific contract or

by the contract’s specificity per se. Thus, we designed Study 2 to test whether contract specificity

by itself is sufficient to reduce relationship expectations. To do so, we manipulated the contract

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proposer and the contract’s specificity, and assessed whether contract specificity still signals

distrust.

Study 2

Study 2 assessed whether the effect of contract specificity was a function of its proposer or

its characteristics. Thus, we manipulated whether the contract was drafted by the participants

themselves or by their counterparts. Given that people are generally risk averse, they should view a

specific contract that they themselves drafted as protecting their own interests. Thus, we predicted

that people would be more satisfied with a contract that they themselves had drafted than with one

that their counterpart had drafted. At the same time, following self-perception theory (Bem, 1972),

we predicted that when people themselves were the proposers of a specific contract, they would

see it as a reflection of how they felt about their counterpart, and infer that they distrusted their

counterpart and had relatively low expectations of their relationship. Thus, we predicted that

regardless of the proposer, contract specificity would still send a strong trust signal: the more

specific the contract, the lower the trust, and the lower people’s expectations of their relationship.

Method

Participants and Procedure

The participants were 157 working adults from a university-operated online subject pool.

They each received an email invitation containing the link to a Qualtrics-hosted survey. They were

randomly assigned to one condition in a 2 (contract proposer: self vs. other) x 2 (specific/general

contract) between-subjects design. To ensure that they were sufficiently engaged, participants who

spent less than 10 seconds reading the instructions and the contract clauses were dropped from the

sample, yielding 132 responses (70% female; mean age = 42.58, SD = 15.58; mean years worked =

20.51, SD = 14.67). Participants who completed the survey were entered into a lottery that awarded

each of four participants a $50 Amazon gift card.

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Participants were asked to imagine that they were the owner of a manufacturing company

and that another manufacturing company had contacted them with the idea of becoming partners.

The two companies had never worked together before; while a good partnership could be very

profitable for the participant’s company, they would also need to protect their own proprietary

knowledge about one of their important products.

Depending on the condition, participants either read a contract that the other company (or

they) had created for their initial meeting. They learned that the contract included a few clauses

that differed from the standard industry format; they then received either a specific or a general

version of these clauses (see Appendix B for their exact wording).

Participants subsequently provided their perceptions of the impending partnership using a

7-point scales (from “not at all” to “very much so”). Nine items adapted from the Subjective Value

Index (Curhan, Elfenbein, & Xu, 2006) assessed their anticipated satisfaction from the partnership

(e.g., “How satisfied do you think you will be with this partnership?” and “Did the agreement build

a good foundation for a future relationship with the other company?”; α=.97). Eight items assessed

their perceptions of their relationship with their partners, (e.g., “How committed and devoted are

you to the partnership?”, “How committed and devoted is your partner?”, and “How much do you

like your partner?”; α=.94). Two questions assessed their trust of their partner (r = .83, p < 0.01).

Participants then reported their demographic information (gender, years worked, and age).

Results

Like Study 1, participants who read the specific contract clauses were less satisfied with the

partnership than those who read the more general contract clauses (MSpecific = 4.24, SD = 1.28 vs.

MGeneral = 5.17, SD = 1.26; F(1, 128) =19.15, p < .001). Also as predicted, the results of an

ANOVA indicated that they were more satisfied with the partnership when they had proposed the

contract (MSelf = 5.06, SD = 1.27 vs. MOther = 4.42, SD = 1.34; F(1, 128) = 9.72, p < .01). The

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interaction was not significant, F(1, 128) = .05, n.s., indicating that their dissatisfaction with the

specific contract was not affected by who had proposed it (see Figure 3a).

--------------Insert Figure 3 about here-------------

They also felt that their relationship would be better if they had proposed the contract and if

the contract was general. As with satisfaction, analysis of their ratings of their anticipated

relationships yielded two main effects and no interactions: the specific contract led to worse

expectations than the general contract, (MSpecific = 4.36, SD = 1.03 vs. MGeneral = 5.04, SD = 1.07;

F(1, 128) =14.67, p < .01); they had more positive expectations when they had proposed the

contract (MSelf = 4.93, SD = 1.11 vs. MOther = 4.53, SD = 1.07; F(1, 128) =5.39, p < .05); and the

interaction was not significant (F < .01, n. s.; see Figure 3B).

Finally, contract specificity also influenced trust, with the specific contract leading to less

trust than the general contract, as predicted (MSpecific = 4.15, SD = 1.37 vs. MGeneral = 4.83, SD =

1.33; F(1, 128) =7.04, p < .01). The identity of the proposer also influenced trust: participants who

proposed the contract trusted their counterpart more than participants who did not (MSelf = 4.81, SD

= 1.28 vs. MOther = 4.22, SD = 1.42; F(1, 128) =8.90, p < .01). Although the interaction was not

significant (F = .37, n. s.), a planned contrast showed that trust was lowest when the other party

proposed a specific contract (M = 3.78, SD = 1.41 vs. M < 4.53 , SD < 1.22 in the other three

conditions, t (128) = 2.60, p = 0.01; see Figure 3C ).

Discussion

Study 2’s results were consistent with Study 1’s and continued to document the negative

effects of complete contracts: people who evaluated complete contracts were less optimistic about

their satisfaction with the partnership, anticipated a worse partnership, and felt less trust toward

their counterparts. Also, although the identity of the proposer mattered, the negative effects of

complete contracts still emerged, even when they themselves had proposed the contract. Thus,

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even when people cannot attribute specificity of a contract to their counterpart, contract specificity

still had the predicted negative impact on their satisfaction, expected relationships, and trust.

Studies 1 and 2 both provided participants with a written contract with varying content

specificity. Study 3 was designed to investigate whether a different manipulation of contractual

completeness – its length, i.e., the number of clauses it includes – has similar effects. Study 3 also

had participants play a more active role in constructing their contracts. In addition, Study 3

investigated whether the effects of a contract have more wide-ranging effects on the participants,

i.e., whether the length of a contract influences actions that are not anticipated by the contract’s

restraints. This often occurs in actual relationships, when unanticipated tasks that require people’s

cooperation surface after a contract has already been signed. Thus, Study 3’s participants faced

two tasks: they first decided how complete or incomplete they wanted their contract to be, and then

they engaged in a new, unexpected task that let them choose how cooperative they would be.

Study 3

Studies 1 and 2 suggested that contract specificity reduces expectations of satisfaction,

hinders relationships, and decreases trust. Study 3 was designed to extend these findings in two

ways, first, by assessing the behavioral consequences of different contracts on cooperation and

coordination, and second, by investigating how a different form of contract completeness – the

number of clauses that a contract includes.

Research shows that many if not most people are conditional cooperators, i.e., they are

willing to cooperate with cooperative others, but not with non-cooperative others (Fehr,

Fischbacher & Gachter, 2002; Malhotra & Murnighan, 2002; Tenbrunsel & Messick, 1999; Wyer,

1969). We predict that requests to include more rather than fewer clauses in a contract signals

uncooperativeness, and thus, should decrease people’s willingness to cooperate. More specifically,

Study 3 investigated whether individuals who requested more complete contracts would lead their

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partners to expect and to engage in less subsequent cooperation. To capture these effects, we

randomly assigned participants to interact with a partner who had proposed a more or less

complete contract that would govern their behavior in a joint math problem-solving task. Then

they played the minimum-effort game (Camerer, 2003), an unanticipated interaction that was not

anticipated by their contract. Thus, Study 3 provided a strong test of our predictions of the negative

relationship effects of complete contracts, as we assessed the impact of contract completeness in

one context on cooperation in another context.5

Method

Participants

The participants were 74 undergraduates (27.8% male; mean age = 19.39, SD = .93) from

the same dedicated subject pool as in Study 1. They arrived at the laboratory in groups of about 12.

In addition to a participation fee of $8, one pair of participants in each session was randomly

chosen to receive the monetary payoffs from their minimum-effort game. These extra payoffs

could range up to $35 per person (Table 1); actual extra payoffs ranged from $7 to $27 per person.

Procedure

Participants were told that they were randomly paired with another, unidentified person in

the room; they would be completing a math task together; and their only chance to communicate

would be by creating a binding agreement that would serve as a contract for how they would act

(or refrain from acting) while working on the task. They were also told that their goal was to solve

as many problems as they could in the time allowed.

The instructions then asked them to consider 15 clauses (see Appendix C for the complete

list) that they could include in their agreement. They were not allowed to change the content of any

of the clauses or add new ones; instead, they simply indicated how many clauses they wanted to

include in the contract. The experimenters collected their responses and ostensibly shared them

18

with their partners. Actually, we manipulated contract completeness by randomly assigning

participants to one of four conditions in which their partner had allegedly asked to include zero,

four, nine, or all fifteen clauses in the upcoming contract. Participants did not learn which of the

clauses their counterparts asked to include.

After learning about their partner’s request, participants played the minimum-effort game

with the same partner with whom they created the contract. In the minimum-effort game, individuals

and their counterparts choose one of nine numerical options; the combination of their choices

determines their payoffs (see Table 1). Although partners can both benefit when they both choose a

high number (cooperative behavior), the person who chooses the higher of the two numbers receives

less than their counterpart. (In experimental economics, the numbers signify levels of effort:

everyone does better if everyone exerts more rather than less effort, but slackers do better than

contributors when their choices differ.) We predicted that people whose partners had proposed more

complete contracts would cooperate less, i.e., they would choose lower numbers, than people whose

partners had proposed less complete contracts.

-----Insert Table 1 about here----

To insure that they understood the payoff matrix, participants first answered two quiz

questions about it. Only a few were incorrect; after they received additional explanation, they all

made their decisions, independently, without communicating with their partner. After making their

decisions in the minimal effort game, participants also indicated the number in the minimum effort

game that they thought that their partner had chosen. The experimenter then explained that, due to

time constraints, they would not be doing the math task. Finally, the experimenter publicly and

randomly chose one pair of participants and paid them privately, according to their decisions. The

participants never met their partners.

Results

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People whose partners asked for more clauses to be included in their contract were less

cooperative than people whose partners asked for fewer clauses (see Figure 4). Multiple regression

analysis indicated that, as the number of clauses their partners proposed increased, participants’

cooperative behavior significantly decreased, (B= -.13, SE = .06, β = -.25; t = -2.15, p < 0.05). The

effect of a partner’s contract clause requests on cooperative behavior remained significant

regardless of how many clauses participants themselves proposed (B= -.12, SE = .06, β = -.24), t =

-2.05, p < 0.05, and participants’ own proposal (M = 7.68, SD = 3.91) had no significant effect on

their own cooperation (B= 0.04, SE = .08, β = .05, t = .42, n.s.), ∆R2 = .002, n.s..

--------------Insert Figure 3 about here-------------

A one-way ANOVA also showed that participants’ cooperative behavior was affected by

the difference between the number of clauses that the participants proposed and the number of

clauses that their partners proposed, F(2, 70) = 5.85, p < 0.01. Contrast analysis indicated that

people cooperated significantly less when their partner wanted to include more clauses than they

did (M = 4.70, SD = 2.86), t(71)= 2.22, p < 0.05; however, they did not cooperate significantly

more when their partner proposed the same number (M = 8.14, SD = 1.86) or fewer clauses (M =

6.11, SD = 2.45), t(71)= -1.91, n.s.. Thus, the effect of negative signals (i.e., a counterpart who

asks for more clauses than oneself) seemed to be stronger than the effect of positive signals (i.e., a

counterpart who asks for fewer clauses than oneself).

Discussion

Study 3’s results documented individuals’ reactions to their partners suggesting an

increasing number of contract clauses, i.e., reduced cooperative behavior and reduced cooperative

expectations. This study used different operationalization of contract completeness than Studies 1

and 2 and expanded the scope of contract completeness’ consequences from the perceptual and

attitudinal consequences in Studies 1 and 2 to actual cooperative behavior. Thus, although having a

20

contract in place may reduce risk and increase task-reliability (Sitkin & Roth, 1993) and

competence-based trust (Malhotra & Lumineau, 2009), these data show that, as partners suggest

more contract clauses, people become less cooperative and expect their counterparts to be less

cooperative – even on a subsequent task that was not directly related to their contract.

Although a comparison of more versus less complete contracts might suggest that more

complete contracts will lead to better outcomes by aligning interests and guarding against

uncertainty (Tirole, 1999), these data suggest that the process of achieving such a contract can

interfere with those positive outcomes. In addition, two different lines of research suggest that the

effects of complete contracts may actually cascade into stable noncooperation and other long-term

negative effects. First, because so many people tend to be conditional cooperators (Fischbacher,

Gachter, & Fehr, 2001; Weber & Murnighan, 2008), getting off on the wrong foot may encourage

them to avoid rather than embrace cooperation (e.g., Lount, Zhong, Sivanathan, & Murnighan,

2008). Secondly, more complete contracts can contribute to long-term noncooperation because

norms emerge quickly and help determine future expectations (Bettenhausen & Murnighan, 1985;

1991). As contracts become more complete and people experience and expect less cooperative

behavior, noncooperation can quickly become a norm. Thus, a seemingly straightforward request

to move toward a more complete contract, which people seem to value, can have paradoxical

effects, both individually and socially, because of the signals it sends. Put simply, the process that

may be necessary to achieve a desirable outcome may be just the process that cannot achieve it.

General Discussion

Results from three studies document the potential damage that negative signals in the

contract drafting process can cause. Although a more rather than a less complete contract can offer

more protection and decrease risk and uncertainty, Study 1 showed that people interpreted the

contracts that they received as trust signals. The more specific contract also led them to reduce

21

their relationship expectations, and their trust perceptions influenced their perceived satisfaction

from the interaction. Using a different participant population, Study 2 replicated Study 1’s results

and showed that specific contracts had damaging effects regardless of who had proposed them.

Finally, Study 3 showed that contracts with more clauses can reduce expectations for a

counterpart’s cooperation as well as cooperation in an unrelated task. Together, these findings

demonstrate a causal link between contract completeness and individuals’ perceptions of their

relationship, interpersonal trust, performance expectations, and actual cooperation.

This research extends previous findings on the effects of contract proposals and contract

removals (Malhotra & Murnighan, 2002) as well as findings on the introduction of monitoring and

sanctioning systems in organizations (Gneezy & Rustichini, 2000; Tenbrunsel & Messick, 1999)

by investigating the consequences of contract completeness. The current findings highlight the fact

that either of two aspects of contract completeness – specificity and length – had adverse effects on

a variety of important outcome variables. Sitkin and Roth (1993, p.376) suggested that “legalistic

remedies can erode the interpersonal foundations of a relationship they are intended to bolster

because they replace reliance on an individual’s good will with objective, formal requirements.”

The current research suggests even more – that attempts to provide structural remedies to risk can

send negative signals that begin to erode a relationship even before the relationship has begun.

Thus, the nature of contract development processes can exacerbate negative expectations and

reduce potential joint outcomes, with the ironic result that individuals may actually achieve the

exact outcomes that they hoped to prevent by creating a contract in the first place.

Contracts and Outcomes

Bohnet, Greig, Herrmann, and Zechkauser (2008) noted that “modern economies have

many instruments…to encourage trust by diminishing the material costs of betrayal” (p. 295). Our

findings suggest that, while complete contracts may protect people’s economic outcomes, as

22

measured by the objective value of the terms of the deal, their psychological effects, as measured

by the subjective value of the “social, perceptual, and emotional consequences” of an interaction

(Curhan, Elfenbein, & Xu, 2006), can suffer. The higher subjective value fostered by incomplete

contracts can also be central to the sustainability of an interaction. People care about the subjective

value of their interactions – they value trust, cooperation, and the intangibles of their relationship –

often more than they care about their objective outcomes (Gelfand, Major, Raver, Nishii, &

O’Brien, 2006). In addition, a longitudinal study of high-stakes employment negotiations suggests

that employees’ subjective values predict their job satisfaction and turnover rates a year later

(Curhan, Elfenbein, and Kilduff, 2009). Thus, their subjective valuations can help people continue

to interact with each other, which can then augment their economic outcomes (Curhan, Elfenbein,

& Eisenkraft, in press). Thus, the current findings suggest that less complete contracts may be able

to increase subjective value and ultimately act as catalysts for economic success.

Contracts and reciprocity

The current findings, coupled with the ubiquity of contracts, also suggest that people value

contracts even though their preferences may be misplaced (e.g. Mulder et al., 2006). The data also

suggest that, by creating less complete contracts, people may actually benefit so much from the

positive relational signals that they send to their partners that their ultimate objective benefits also

increase. Increasing trust through incomplete contracts, for example, can increase cooperation

(Mayer, Davis, and Schoorman, 1995), generate more integrative solutions (Carnevale & Isen,

1986), and pave the way for future interactions (Gelfand et al., 2006).

Less complete contracts can also provide the kind of order and control that people hope for

from their more complete contracts. The presence of an almost-universal norm of reciprocity

(Goulder, 1960), for instance, may mean that people do not need more complete contracts, even

when they have no past history with each other. Some researchers have suggested, for instance,

23

that strong reciprocity is not only evolutionarily sound (Fehr, Fischbacher and Gachter, 2002;

Gintis, 2000) but also strategically optimal (Axelrod, 1984), enabling cooperation to persist and

propagate without the need for formal structures like contracts (Baker, 1993; Simon, 1981).

Rational and relational contracting

People tend to approach the contracting process carefully and rationally, especially when

lawyers carefully draft sets of contingencies and clauses to anticipate a wide array of potential

scenarios. The current results, in contrast, suggest that a more relationally-oriented approach to

contracting might be more effective. In essence, the normal contracting process and its

opportunities for sending far too many negative signals suggest that other means for reaching

agreements might be particularly valuable. Friends who engage in the transfer of goods or services

for monetary amounts, for example, often feel considerable discomfort with the exchange, as

communal relationships and market pricing engender many inconsistent forces (Baker & Emery,

1993; Fiske & Tetlock, 1997; Mahar, 2003; Tetlock, Kristel, Elson, Green, & Lerner, 2000;

Tetlock, Peterson, and Lerner, 1996). Rather than pushing for more complete contracts, then,

people might benefit by pushing for less. Thus, future research should evaluate whether any push

for a contract is detrimental, or whether a push for a relationally-oriented rather than a complete,

economically-oriented contract is more effective. The negotiation literature indirectly suggests that

this may be true: when two negotiation parties recognize their relational dynamics, they tend to

pay much more attention to interpersonal connectedness (Cross, Morris, & Gore, 2002) and

relational information processing (Cross & Madson, 1997) than they do to the normal give-and-

take of objective exchange. As a result, their negotiations can strengthen their relationship and

ultimately lead to considerable economic gain (Gelfand et al., 2006). Thus, the current research

implies that, rather than increasing risk and uncertainty, an incomplete contract may foster

efficiency.

24

Previous work on motivation and control has also shown, theoretically (Dur, 2009;

Ellingsen & Johannesson, 2008; Rotemberg & Saloner 1993) and empirically (Falk & Kosfeld,

2006), that workers are willing to exchange a decrease in monetary compensation for an increase

in socio-emotional compensation. Within the worker/employer relationship, managers may be able

to signal their intentions for cooperative relationships and elicit reciprocity from their workers by

creating incomplete contracts. The current paper suggests that these effects may be due to the

signaling effects of less complete contracts.

Limitations and future directions

One potential limitation of the current research is that the contracts studied here were

designed to regulate the relationships within teams and workgroups and did not involve either

high-stakes or risky transactions. The magnitude of the stakes, however, does not necessarily alter

the fundamentals of the contracting process. Woodrow Wilson’s famous quote, for instance, is one

example, i.e., ”University politics are so vicious precisely because the stakes are so small."

Another comes from the Department of General Services of the State of California, which had

103,115 contractual transactions in 2009, ranging from the purchase of $11 worth of adhesive tape

to more substantial expenditures such as fixing aircraft engines (California Procurement

Department, 2010). A subset of these data (n = 10,571) included information concerning the

number of amendments in each of the contracts, which ranged from zero to four. Most of these

contracts (n =8903) required no amendments, including the four contracts that were worth the

most, from $2 million to more than $3 billion. Thus, the stakes were essentially unrelated to the

number of amendments in a contract; in similar fashion, high stakes interactions may not require

the inclusion of multiple clauses or a more complete contract than low stakes interactions.

People often have considerable experience with contracts, from credit card agreements to

car purchase guarantees to employment contacts to tuition agreements. When two parties draft a

25

contract that governs their actions, they often have clear expectations about the contract’s

characteristics and, as noted, they seem to prefer a more rather than a less complete contract. Thus,

people who express no interest in creating a contract, particularly when contracts are normatively

expected, may also send a negative signal. Thus, it is possible that people expect their relationship

to suffer when their counterparts do not suggest any clauses in a contract compared to when their

counterparts do suggest some. Although complete contracts may reduce relationship expectations

and trust, refusing to consider a contract when one is expected may be no better. Thus, future

research might investigate the combined effects of contract expectations, relationship expectations,

and contract completeness, in a variety of different contexts.

The current paper focuses on the number and the specificity of contract clauses. Previous

research suggests that the nature of the clauses can also have signaling effects. Tenbrunsel and

Messick (1999), for instance, found that the addition of a monitoring and sanctioning system in a

multiparty social dilemma had exactly the opposite of its intended results: it significantly reduced

cooperation. Similarly, Gneezy and Rustichini (2000) found that introducing a fine on parents who

picked up their children late from a day care center led them to pick up their children even later. In

addition, a return to the old, sanction-free, system had little impact: parents continued to be later

than they were before fines were instituted in the first place. Thus, future research might

investigate the implications of adding different types of clauses to contracts.

Finally, incomplete contracts may not always be beneficial to the parties involved. When

relational cues cannot be perceived or may not be applicable, the positive signals that accompany

incomplete contracts not exist. The same conditions might also attenuate the negative

consequences of complete contracts. Interactions in lean communication channels, such as email,

for example, might attenuate complete contracts’ negative signals. Future research could address

these possibilities as well.

26

Conclusion

Contracts are designed to provide people with security and certainty. They permeate

modern society, particularly in the U. S. How they are created might be as important, ultimately, as

their specific character, as the contracting process can send a variety of unintended relational

signals. The current research documented several adverse effects of contract completeness on

interpersonal expectations and cooperation. The paradoxes of contracts are troubling, even as their

intent is laudable, which makes the possibility of subsequent investigations that much more

important.

27

Authors Note

We thank Deepak Malhotra and conference participants at Judgment and Decision Making

Conference, 2010, for their helpful comments.

28

Notes

1. We limit our analyses to two-party interactions. Contracts among more than two parties

complicate the model presented here, and are beyond the scope of this paper.

2. Contracts cannot eradicate uncertainty because they can never be completely specified (Coase,

1937). Hiring contracts, for instance, can specify the number of hours workers must invest in a

day, but they cannot easily describe how hard they must work or specify all of the conditions

that might require extraordinary effort or result in extraordinary rewards. Thus, to stimulate

effort (and its requisite performance increments), some companies offer relatively high wages,

hoping that employees will reciprocate with higher effort (Akerlof, 1984; Fehr, Kirchsteiger, &

Riedl, 1993; Prendergast, 1999; Wang & Murnighan, 2010). These employers pay a premium

in an attempt to reduce opportunism, even when an employment contract is in place.

3. Classical contract law imposes many constraints on contracting parties. As a result,

neoclassical systems allow more flexibility by using established standards and arbitration

(Macneil, 1978). Allowing contracts to be more flexible, however, is not the same as

intentionally leaving a contract incomplete, which is the focus of the current paper.

4. Research suggests, for example, that jurors often fail to discount evidence even after it has

been discredited or ruled inadmissible (Steblay, Hosch, Culhane & McWethy, 2006).

5. Contracts may be most crucial for guarding against uncertainty and unexpected events. Thus,

by measuring people’s spontaneous cooperation in a task that was not specified in the contract

itself, our design may have a higher degree of realism.

29

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38

Table 1. Payoff matrix of the minimum effort (cooperation) game

The smaller number chosen between you and your partner

Your Choice NINE EIGHT SEVEN SIX FIVE FOUR THREE TWO ONE

NINE $35 $31 $27 $23 $17 $13 $9 $5 $1

EIGHT - $33 $29 $25 $21 $15 $11 $7 $3

SEVEN - - $31 $27 $23 $17 $13 $9 $5

SIX - - - $29 $25 $21 $15 $11 $7

FIVE - - - - $27 $23 $17 $13 $9

FOUR - - - - - $25 $21 $15 $11

THREE - - - - - - $23 $17 $13

TWO - - - - - - - $21 $15

ONE - - - - - - - - $17

39

Figure 1. Effects of contract specificity on perceptions of being trust, and on trust and liking one’s

counterpart – Study 1

2.5

3

3.5

4

4.5

5

Trusted Trusting Liking

General Contract Specific Contract

40

Figure 2A: The results of a mediation analysis of contract specificity on trust – Study 1

β = -.91*

(β = -.28)

β = .88** β = -.72*

Trust Signal

Strength

Contract

Specificity

Degree of

Trust-felt

*p<0.05; **p<0.01

41

Figure 2B. The results of a mediation analysis of contract specificity on perceived satisfaction –

Study 1

β = -.82*

(β = -.31)

β = .55** β = -.91*

Degree of

trust-felt

Contract

Specificity

Perceived

Satisfaction

*p<0.05; **p<0.01

42

Figure 3. The effects of contract specificity and the identity of the proposer on satisfaction with the

partner, expectations of the relationship, and perceived trust – Study 2

3

3.5

4

4.5

5

5.5

6

Self-proposed Other-proposed

Per

ceiv

ed S

ati

sfa

ctio

n

General Specifict

3

3.5

4

4.5

5

5.5

6

Self-proposed Other-proposed

An

tici

pa

ted

Rel

ati

on

ship

General Specifict

3

3.5

4

4.5

5

5.5

6

Self-proposed Other-proposed

Per

ceiv

ed T

rust

General Specifict

43

Figure 4: The effects of contract completeness on cooperative behavior – Study 3

4

4.5

5

5.5

6

6.5

7

7.5

8

Zero Four Nine Fifteen

Coop

erati

on

: N

um

ber

ch

ose

n i

n t

he

min

ima

l ef

fort

ga

me

Number of clauses the "counterpart" proposed to include

Own

Cooperation

Estimated

Partner's

Cooperation

44

Appendix A

Logic Puzzles

Logic puzzle was first produced by Charles Lutwidge Dodgson, who is better known under his pen name

Lewis Carroll, the author of Alice's Adventures in Wonderland. Some popular forms of logic puzzles

include Sudoku, which involves using deduction to correctly place numbers in a grid; and logic mazes,

which involve using deduction to figure out the rules of a maze1.

Today, you will be taking a visual-spatial logic quiz. The quiz consists of 18 logic puzzles. Each puzzle will

present you with four boxes that create a certain logical pattern. Your task is to choose a fifth box, among 5

possibilities, that should appear next. Below is an example of the type of puzzles you will see:

In this example, you need to find the fifth box (A-E) that continues the logical pattern in the first row.

Here’s the solution: In the first row, the first box has 5 short lines and no long lines, the second box: 4 short

& 1 long, the third box: 3 short & 2 long, the fourth box 2 short and 3 long. So each time there is one more

long line and one less short line, so in the fifth box there will be 1 short and 4 long lines: the answer is A.

Below is another puzzle. Try to solve it yourself and insert your answer here: __________

A B C D E

A B C D E

A B C D E

45

Appendix B

Terms of Agreement (General)

Both parties will devote themselves to the quiz and not take breaks.

Both parties will try their best to answer as many of the questions correctly as they can.

Both parties will mute their electronic devices and keep them out of sight before the quiz starts.

Each party can ask the experimenter to verify that the other party is indeed working on the quiz.

Both parties will sign and date their response sheet.

Terms of Agreement (Specific)

Both parties will devote the full 2 minutes to the quiz and not spend time on texting or checking emails etc.

Both parties will try their best to answer each of the 18 questions with zero errors.

Both parties will change their electronic devices to silent mode and keep them in their backpacks before the

quiz starts.

Each party can ask the experimenter to check the other party’s cubicle and response sheet to verify that s/he

is indeed working on the quiz.

Both parties will sign and date the last question that they answer.

46

Appendix C

Terms of Agreement

EFFORT AND PERSISTENCE: Both parties will work throughout the 3 minutes without taking any breaks or

doing any kind of unrelated tasks (e.g. texting messages).

HONEST DISCLOSURE: Each party will disclose its TRUE level of competence in solving questions at each

of the three levels.

FINAL ARBITRATION: In case of disagreement between the two parties concerning the correct answer to one

of the questions, the experimenter will serve as final arbitrator.

CONDUCT: I will try my best to answer as many questions as fast and as accurately as I can, with accuracy

being my primary concern.

ETHICAL CONDUCT: Both parties will put away at the beginning of the quiz all their electronic devices

(e.g., cell phones) at the other end of the room.

INCENTIVE: I am willing to provide additional incentives, such as treating the other party to a cup of coffee

afterwards, if the two of us do well on this task.

SANCTION: If I catch any mistakes in my partner’s calculations, I can impose a sanction on him/her. For

example, I can take a quarter from his/her final earnings of the day.

TERMINATION: In the suspect that one party suspects that the other party violated any of the terms of the

agreement, he/she may ask the experimenter to terminate the participation of both parties in the task.

MONITORING: Each party will be able to ask the experimenter to observe and verify that the other party is

indeed working to complete the task.

GOAL: The goal is for both of us to answer as many questions correctly as possible, so that we can earn as much

money as possible.

ROLE SPECIFICATION: We will each resume a specific role. One person should be the ________ and the

other person the ______ (examples: answerer, checker, reader, time keeper, etc.).

ACCOUNTABILITY: I will put my initials next to each of the questions that I answer .

CENSURE: I will openly accept corrections and criticisms from my partner.

TASK DELEGATION & TIME MANAGEMENT: We should each take ____ of the questions. We should

devote _____ minutes to answering the questions and _____ minutes to checking our answers.

SIGNATURE and DATE: Both of us will sign and date this contract