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To Choose or Not to Choose: Contracts, Reference Points, Reciprocity, and Signaling

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Hart and Moore (2008) argue that varying degrees of flexibility in contracts induce differing reference points and aspiration levels for parties’ shares of a transaction’s total surplus. As a consequence, a trade-off between adaptational flexibility and the prevention of distributional conflicts emerges. In a recent paper, Fehr et al. (2009b) analyze a buyer-seller-relationship with incomplete contracts and ex ante uncertainty regarding the sellers’ cost level to test these effects. We re-run their experiment and introduce another treatment with exogenously determined contract types. Like FHZ we find reference point effects in both treatments. However, uncooperative shading behavior in our treatments differs substantially from that described in FHZ. Furthermore, it makes a significant difference whether contract types are determined by buyers or determined exogenously. We explain this by introducing two further effects, a reciprocity effect and a signaling effect.

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Paper provided by Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal) in its series TUC Working Papers in Economics with number 0007.

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Length: 22 pages
Date of creation: 2012
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Handle: RePEc:tuc:tucewp:0007

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Keywords: contracts; reference points; experiment;

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Cited by:
  1. Mathias Erlei & Wiebke Roß, 2013. "Bounded Rationality as an Essential Ingredient of the Holdup Problem," TUC Working Papers in Economics 0009, Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal).

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