Contracts as Reference Points

Oliver Hart and John Moore

ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh

Abstract: We argue that a contract provides a reference point for a trading relationship: more precisely, for parties’ feelings of entitlement. A party’s ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcome to uncertainty, but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments, and elucidates why “employment” contracts, which fix wage in advance and allow the employer to choose the task, can be optimal.

New Economics Papers: this item is included in nep-bec, nep-cbe and nep-upt
Date: 2007-09-20
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Related works:
Working Paper: Contracts as Reference Points (2006)
Journal Article: Contracts as Reference Points (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:edn:esedps:170

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