Contracts as Reference Points—Experimental Evidence

Fehr, Ernst; Hart, Oliver; Zehnder, Christian

doi:10.1257/aer.101.2.493

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American Economic Review: Vol. 101 No. 2 (April 2011)

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Contracts as Reference Points—Experimental Evidence

Article Citation

Fehr, Ernst, Oliver Hart, and Christian Zehnder. 2011. "Contracts as Reference Points—Experimental Evidence." American Economic Review, 101(2): 493-525.

DOI: 10.1257/aer.101.2.493

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)

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Authors

Fehr, Ernst (Institute for Empirical Research in Economics, U Zurich)
Hart, Oliver (Harvard U)
Zehnder, Christian (U Lausanne)

JEL Classifications

D44: Auctions
D86: Economics of Contract: Theory
J41: Labor Contracts