Contracts as Reference Points—Experimental Evidence
American Economic Review
vol. 101,
no. 2, April 2011
(pp. 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)Citation
Fehr, Ernst, Oliver Hart, and Christian Zehnder. 2011. "Contracts as Reference Points—Experimental Evidence." American Economic Review, 101 (2): 493-525. DOI: 10.1257/aer.101.2.493Additional Materials
JEL Classification
- D44 Auctions
- D86 Economics of Contract: Theory
- J41 Labor Contracts