Contracts, Reference Points, and Competition-Behavioral Effects of The Fundamental Transformation

Ernst Fehr, Oliver Hart and Christian Zehnder

Journal of the European Economic Association, 2009, vol. 7, issue 2-3, 561-572

Abstract: In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a "fundamental transformation" (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before. (JEL: C91, D03, D23) (c) 2009 by the European Economic Association.

JEL-codes: C91 D03 D23 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (43)

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