The Interplay of Formal, Informal and Relational Contracts: Evidence from Movies.
Abstract: This paper empirically examines the interplay of formal, informal and relational contracts in the Spanish movie exhibition industry. In this industry, distributors contract with exhibitors to show their movies in their theaters using formal or informal contracts and an ex-post renegotiation mechanism that only compensates the latter. The paper develops a theory of renegotiation and learning with incomplete contracts. I adapt the theoretical framework in Baker, Gibbons and Murphy (1994) to the institutional detail of the movie industry and derive clear testable implications that I take to the data. For this purpose, I use a new dataset of revenue-sharing contracts and renegotiation outcomes in the Spanish movie industry. I find that distributors are more likely to use formal contracts when the reneging temptation is stronger and that movies that perform overall below expectations are renegotiated more often. Following this, I find evidence that economic agents learn across periods about the real movie audience appeal and use the new information to adjust their beliefs and make optimal movie run stopping decisions. Finally, I provide an upper bound estimate of the gains of using informal contracts (through contractual incompleteness) in both movie run length and theater revenues.
