Contracts as Reference Points

Oliver Hart and John Moore

No 12706, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D23 D86 K12 (search for similar items in EconPapers)
Date: 2006-11
New Economics Papers: this item is included in nep-upt
Note: CF LE LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02.

Downloads: (external link)
http://www.nber.org/papers/w12706.pdf (application/pdf)

Related works:
Journal Article: Contracts as Reference Points (2008)
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:nbr:nberwo:12706

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12706

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().