Quarterly Journal of Economics Vol. 123 No. 1 2008
Contracts as Reference Points*
Abstract
We argue that a contract provides a reference point for a trading relationship: more precisely, for parties' feelings of entitlement. A party's ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcomes to uncertainty but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments and elucidates why “employment” contracts, which fix wages in advance and allow the employer to choose the task, can be optimal.
- DOI
- 10.1162/qjec.2008.123.1.1
- Volume
- 123
- Issue
- 1
- Pages
- 1-48
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref