Contracts as Reference Points--Experimental Evidence

Ernst Fehr, Oliver Hart and Christian Zehnder

American Economic Review, 2011, vol. 101, issue 2, 493-525

Abstract: Hart and John Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and the employment relation. We examine experimentally their idea that contracts serve as reference points. The evidence confirms the prediction that there is a trade-off between rigidity and flexibility. Flexible contracts--which would dominate rigid contracts under standard assumptions--cause significant shading in ex post performance, while under rigid contracts much less shading occurs. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract. (JEL D44, D86, J41)

Date: 2011
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Citations: View citations in EconPapers (121)

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Working Paper: Contracts as Reference Points: Experimental Evidence (2008)
Working Paper: Contracts as Reference Points - Experimental Evidence (2008)
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