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Reference Points, Social Norms, And Fairness In Contract Renegotiations

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  • Björn Bartling
  • Klaus M. Schmidt

Abstract

How does an ex-ante contract affect behavior in an ex-post renegotiation game? We address this question in a canonical buyer–seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threat points. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex-ante contract was written. The ex-ante contract causes sellers to ask for markups that are 45% lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. These effects do not depend on whether the contract was written under competitive or monopolistic conditions. Our results provide strong evidence supporting the hypothesis that contracts serve as reference points that shape and coordinate the expectations of the contracting parties.

Suggested Citation

  • Björn Bartling & Klaus M. Schmidt, 2015. "Reference Points, Social Norms, And Fairness In Contract Renegotiations," Journal of the European Economic Association, European Economic Association, vol. 13(1), pages 98-129, February.
  • Handle: RePEc:bla:jeurec:v:13:y:2015:i:1:p:98-129
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    File URL: http://hdl.handle.net/10.1111/jeea.12109
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    References listed on IDEAS

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    1. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-785, July.
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    Cited by:

    1. Kunte, Sebastian & Wollni, Meike, 2015. "Risky Environments, Hidden Knowledge, and Preferences for Contract Flexibility: An Artefactual Field Experiment," Discussion Papers 205914, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    2. Marco Fongoni & Alex Dickson, 2015. "A theory of wage setting behavior," Working Papers 1505, University of Strathclyde Business School, Department of Economics, revised Feb 2016.
    3. repec:eee:pubeco:v:156:y:2017:i:c:p:34-47 is not listed on IDEAS
    4. Gine,Xavier & Jacoby,Hanan G. & Gine,Xavier & Jacoby,Hanan G., 2016. "Markets, contracts, and uncertainty in a groundwater economy," Policy Research Working Paper Series 7694, The World Bank.
    5. Andreas Hack & Frauke Bieberstein & Nils D. Kraiczy, 2016. "Reference point formation and new venture creation," Small Business Economics, Springer, vol. 46(3), pages 447-465, March.
    6. Emin Karagözoğlu & Kerim Keskin, 2015. "A Tale of Two Bargaining Solutions," Games, MDPI, Open Access Journal, vol. 6(2), pages 1-14, June.
    7. Schmidt, Klaus, 2017. "The 2016 Nobel Memorial Prize in Contract Theory," Rationality and Competition Discussion Paper Series 19, CRC TRR 190 Rationality and Competition.
    8. repec:aea:aecrev:v:107:y:2017:i:7:p:1731-52 is not listed on IDEAS
    9. Bartling Björn & Grieder Manuel & Zehnder Christian, 2014. "Does competition justify inequality?," ECON - Working Papers 158, Department of Economics - University of Zurich, revised Nov 2015.

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