Dual anchors in the shadow of the future: how renewal expectations and relational history govern behavior in public contracts

Original

Dual anchors in the shadow of the future: how renewal expectations and relational history govern behavior in public contracts

Deanna Malatesta, Faisal Saeed Cheema

Abstract

Abstract This study extends relational contract theory by showing how behavioral reference points can be established through policy. We theorize that contracts are governed by dual anchors: backward-looking relational history and forward-looking renewal expectations. Analyzing 430 public legal service contracts using Heckman selection models, we find relational history increases prices in amendments, revealing its “dark side.” A nonbinding renewal clause, however, significantly attenuates this effect, reducing price increase probability by up to 37 percentage points. These findings resolve the puzzle that renewal clauses, though present in fewer than half of contracts, disproportionately appear in amended agreements. The clause does not guarantee renewal but alters behavioral logic, transforming the supplier’s reference point from backward-looking entitlement to forward-looking relationship preservation. Our findings provide microfoundations for how institutions structure relational dynamics and demonstrate how procurement design can shape expectations to improve outcomes.