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  3. American Economic Review
  4. April 2011
  5. Contracts as Reference Points—Experimental Evidence

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Contracts as Reference Points—Experimental Evidence

  • Ernst Fehr
  • Oliver Hart
  • Christian Zehnder
American Economic Review
vol. 101, no. 2, April 2011
(pp. 493–525)
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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.101.2.493

Additional Materials

JEL Classification

  • D44 Auctions
  • D86 Economics of Contract: Theory
  • J41 Labor Contracts