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Contracts as Reference Points--Experimental Evidence

  • Ernst Fehr
  • Oliver Hart
  • Christian Zehnder

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)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 2 (April)
Pages: 493-525

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:493-525
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