The Interplay of Formal and Relational Contracts: Evidence from Movies.

This article empirically examines the interplay of formal and relational contracting in the Spanish movie industry. Using institutional knowledge, I extend the existing theory on explicit and implicit contracts to include learning, a critical element of contracting in the movie industry. Subsequently, I show results consistent with the theory using a unique data set from a Spanish movie exhibitor with detailed information on the use of formal contracts and ex post contractual adjustments. My results show that distributors are more likely to use formal contracts for movies of higher expected value. Consistent with well-established results of the relational contracting literature, distributors use formal contracts to deter exhibitors’ opportunistic behavior since their reneging temptations from implicit agreements are strongest for this type of movies. Conditional on using a formal contract, I find that ex post renegotiation is more likely to occur when the movie performs below expectations. [ABSTRACT FROM PUBLISHER]

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