Contracts as Reference Points—Experimental Evidence

 
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Fehr, Ernst
Hart, Oliver
Zehnder, Christian
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https://doi.org/10.1257/aer.101.2.493
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Fehr, Ernst, Oliver Hart, and Christian Zehnder. 2011. “Contracts as Reference Points—Experimental Evidence.” American Economic Review101 (2): 493–525. https://doi.org/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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http://nrs.harvard.edu/urn-3:HUL.InstRepos:41534586

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