Contracts as Reference Points-Experimental Evidence

Fehr, Ernst

doi:10.1257/aer.101.2.493

Contracts as Reference Points-Experimental Evidence

2011-04-01

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DOI：10.1257/aer.101.2.493

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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)

Keywords:

GIFT EXCHANGE

LABOR-MARKET

FAIRNESS

COMPETITION

OWNERSHIP

Contracts as Reference Points-Experimental Evidence

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