Experimental Design Details
Stage 1: The Buyer initiates the process by proposing a contract encompassing the Price (P) of the product and the Damages for Breach of Contract (D) payable by the Seller. P represents the price to be paid by the Buyer to the Seller upon successful delivery of the product. D is the compensation paid by the Seller to the Buyer in the event of a contract breach, where the Seller declines to deliver the product, and the Buyer agrees to the breach without insisting on product delivery. Participants are allowed to choose P and D within the range of 0 to 500.
Stage 2: The Seller makes a critical decision to either Accept or Reject the proposed contract by the Buyer. If accepted, both parties proceed to Stage 3. In the case of rejection, the round concludes, and both Seller and Buyer earn zero points for the round.
Stage 3: The Seller, having observed the production cost, determines whether to deliver the product. If affirmative, the round concludes, with the Seller earning (Price – Cost) and the Buyer earning (Value - Price). If negative, the Seller and Buyer progress to Stage 4.
Stage 4 (OD only): The Buyer, after observing the value of the product, decides whether to veto the Seller’s decision of not delivering the product. If a veto is exercised, the round concludes, with the Seller earning (Price – Cost) and the Buyer earning (Value - Price). If no veto is made, the round concludes, and the Seller earns (– D), while the Buyer earns (D).
We add a cheap talk as additional treatments to see how communication between two parties can impact the outcome.
This experimental procedure spans 30 rounds, with participants randomly assigned the roles of Seller or Buyer for the first 15 rounds and then switching roles for the subsequent 15 rounds. Each participant begins with an endowment of 400 points, with the cumulative points earned from one randomly selected round in each set of 15 determining the payment outcome. Positive points are added to the initial 400 points, while negative points are subtracted. Additionally, every 50 points are equivalent to $1, in addition to the $5 show-up fee. Before commencing the experiment, participants are required to answer quiz questions designed to enhance their understanding of the game.