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Contracts, Reference Points, and Competition-Behavioral Effects of The Fundamental Transformation

Author

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  • Ernst Fehr
  • Oliver Hart
  • Christian Zehnder

Abstract

In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a "fundamental transformation" (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before. (JEL: C91, D03, D23) (c) 2009 by the European Economic Association.

Suggested Citation

  • 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.
  • Handle: RePEc:tpr:jeurec:v:7:y:2009:i:2-3:p:561-572
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    Citations

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    Cited by:

    1. Claudia M. Landeo & Kathryn E. Spier, 2016. "Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 235-273, June.
    2. 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.
    3. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "How do informal agreements and renegotiation shape contractual reference points?," ECON - Working Papers 043, Department of Economics - University of Zurich.
    4. repec:eee:jeborg:v:145:y:2018:i:c:p:176-201 is not listed on IDEAS
    5. Berde, Éva, 2013. "A fundamentális transzformáció és a referenciapont szerepe a hiányos szerződések elméletében
      [The role of basic transformation and reference point in the theory of incomplete contracts]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 865-885.
    6. repec:bla:jemstr:v:25:y:2016:i:4:p:958-989 is not listed on IDEAS
    7. Alexander W. Cappelen & Rune Jansen Hagen & Erik Ø. Sørensen & Bertil Tungodden, 2014. "Do Non-Enforceable Contracts Matter? Evidence from an International Lab Experiment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 100-113, March.
    8. Schmidt, Klaus, 2017. "The 2016 Nobel Memorial Prize in Contract Theory," Rationality and Competition Discussion Paper Series 19, CRC TRR 190 Rationality and Competition.
    9. Erlei, Mathias & Reinhold, Christian, 2016. "Contracts as reference points—The role of reciprocity effects and signaling effects," Journal of Economic Behavior & Organization, Elsevier, vol. 127(C), pages 133-145.
    10. Bartling Björn & Grieder Manuel & Zehnder Christian, 2014. "Does competition justify inequality?," ECON - Working Papers 158, Department of Economics - University of Zurich, revised Nov 2015.
    11. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference-Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.
    12. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    13. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    14. Björn Bartling & Manuel Grieder & Christian Zehnder, 2014. "Let the Market Decide: An Experimental Study of Competition and Fairness," CESifo Working Paper Series 4831, CESifo Group Munich.
    15. repec:eee:pubeco:v:156:y:2017:i:c:p:34-47 is not listed on IDEAS
    16. Cappelen, Alexander W. & Hagen, Rune Jansen & Sørensen, Erik Ø. & Tungodden, Bertil, 2012. "DO NON-ENFORCEABLE CONTRACTS MATTER? EVIDENCE FROM AN INTERNATIONAL LAB EXPERIMENT Department," Working Papers in Economics 16/12, University of Bergen, Department of Economics.
    17. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    18. Fabian Herweg & Klaus M. Schmidt, 2015. "Loss Aversion and Inefficient Renegotiation," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 297-332.
    19. 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.
    20. Ernst Fehr & Oliver Hart & Christian Zehnder, 2015. "How Do Informal Agreements And Revision Shape Contractual Reference Points?," Journal of the European Economic Association, European Economic Association, vol. 13(1), pages 1-28, February.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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