Reference points in renegotiations: The role of contracts and competition

Björn Bartling and Klaus Schmidt ()

No 89, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Several recent papers argue that contracts provide reference points that affect ex post behavior. We test this hypothesis in a canonical buyer-seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threatpoints. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written. The ex ante contract causes sellers to ask for markups that are 45 percent lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. We do not find that these effects are stronger when the initial contract is concluded under competitive rather than monopolistic conditions.

Keywords: Renegotiation; bargaining; reference points; contracts; competition (search for similar items in EconPapers)
JEL-codes: C78 C91 D03 D86 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-bec and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Reference Points in Renegotiations: The Role of Contracts and Competition (2012)
Working Paper: Reference Points in Renegotiations: The Role of Contracts and Competition (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:089

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