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Contracts as Reference Points--Experimental Evidence

Author

Listed:
  • Ernst Fehr
  • Oliver Hart
  • Christian Zehnder

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)

Suggested Citation

  • Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    • Handle: RePEc:aea:aecrev:v:101:y:2011:i:2:p:493-525
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    More about this item

    JEL classification:

    • D0 - Microeconomics - - General
    • K0 - Law and Economics - - General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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