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Contracts, Reference Points, and Competition-Behavioral Effects of The Fundamental Transformation

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Author Info
Ernst Fehr
Oliver Hart
Christian Zehnder

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Abstract

In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a "fundamental transformation" (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before. (JEL: C91, D03, D23) (c) 2009 by the European Economic Association.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/JEEA.2009.7.2-3.561
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Publisher Info
Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 7 (2009)
Issue (Month): 2-3 (04-05)
Pages: 561-572
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Handle: RePEc:tpr:jeurec:v:7:y:2009:i:2-3:p:561-572

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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This page was last updated on 2009-11-16.

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