Investing in communication: An experimental study of communication in a relational contract setting

I use laboratory experiments to examine the effect of truthful and cheap communication in a relational contracting setting. Specifically, I examine two communication types: one in which subjects can send both untruthful and truthful messages, and another in which only truthful messages may be sent. The results indicate ability to send truthful messages-compared to no messages-improves quality traded, ultimately leading to higher social surplus and lower income inequality. When truthfulness is not required, trade volume does not increase, nor does quality traded improve. However, I find in this case buyers also are less likely to defect on bonus payments. The results have implications for the development and improvement of communication platforms designed to improve trading outcomes. This is especially true as a larger portion of transactions move online, shifting the nature of communication.