Contracts as Reference Points

Oliver Hart and John Moore

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

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 outcome 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 wage in advance and allow the employer to choose the task, can be optimal.

JEL-codes: D23 D86 K12 (search for similar items in EconPapers)
Pages: 66
Date: 2006-11
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Contracts as Reference Points (2008)
Working Paper: Contracts as Reference Points (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:170

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