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How Do Informal Agreements and Renegotiation Shape Contractual Reference Points?

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Author Info

  • Fehr, Ernst

    () (University of Zurich)

  • Hart, Oliver

    () (Harvard University)

  • Zehnder, Christian

    () (University of Lausanne)

Abstract

Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6095.

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Length: 56 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:iza:izadps:dp6095

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Keywords: contracts; reference points; fairness; renegotiation; informal agreement;

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References

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  1. Charness, Gary B & Rabin, Matthew, 2001. "Understanding Social Preferences With Simple Tests," University of California at Santa Barbara, Economics Working Paper Series qt0dc3k4m5, Department of Economics, UC Santa Barbara.
  2. Ernst Fehr & Lorenz Goette & Christian Zehnder, 2008. "A behavioral account of the labor market: the role of fairness concerns," IEW - Working Papers 394, Institute for Empirical Research in Economics - University of Zurich.
  3. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
  4. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points – experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
  5. Ernst Fehr & Oliver Hart & Christian Zehnder, 2009. "Contracts, Reference Points, and Competition-Behavioral Effects of The Fundamental Transformation," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 561-572, 04-05.
  6. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
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Cited by:
  1. Cappelen, Alexander W. & Hagen, Rune Jansen & Sørensen, Erik Ø. & Tungodden, Bertil, 2012. "Do non-enforceable contracts matter? Evidence from an international lab experiment," Discussion Paper Series in Economics 2/2012, Department of Economics, Norwegian School of Economics, revised 03 Apr 2012.
  2. Charness, Gary & Brandts, Jordi & Ellman, Matthew, 2012. "Let’s talk: How communication affects contract design," University of California at Santa Barbara, Economics Working Paper Series qt6z24s6rv, Department of Economics, UC Santa Barbara.

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