American Economic Review Vol. 101 No. 2 2011

Contracts as Reference Points—Experimental Evidence

Ernst Fehr¹; Oliver Hart²; Christian Zehnder³

¹ Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zurich. · ² Department of Economics, Harvard University, Littauer Center 220, 1805 Cambridge Street, Cambridge, MA 02138. · ³ Faculty of Business and Economics, University of Lausanne, Quartier UNIL-Dorigny, Internef 612, CH-1015 Lausanne.

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.

DOI

10.1257/aer.101.2.493

Volume

101

Issue

2

Pages

493-525

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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