New Frontiers in Empirical Research on Informal Contracting

In standard models of informal contracting, parties use discretionary payments to split the known value of their relationship, which results in stable efficient contracts over time. Relaxing simplifying assumptions, recent models shed light on how informal contracts evolve over time, the creation of relational rents, and their sensitivity to path dependence. This paper investigates how these nonstandard theories of informal contracts can be tested empirically. We first discuss predictions from a selection of representative models, and strategies necessary to test them. We then examine how existing evidence supports these predictions, and how available data may be used for further testing.