Contracts as Reference Points

Oliver Hart and John Moore

The Quarterly Journal of Economics, 2008, vol. 123, issue 1, 1-48

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 outcomes 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 wages in advance and allow the employer to choose the task, can be optimal.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (344)

Downloads: (external link)
http://hdl.handle.net/10.1162/qjec.2008.123.1.1 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Contracts as Reference Points (2006)
Working Paper: Contracts as Reference Points (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:123:y:2008:i:1:p:1-48.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva

More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().