NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Contracts as Reference Points

Oliver Hart, John Moore

NBER Working Paper No. 12706
Issued in November 2006
NBER Program(s):   CF   LE   LS

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.

download in pdf format
   (281 K)

email paper

This paper is available as PDF (281 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12706

Published: Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 1-48, 02. citation courtesy of

Users who downloaded this paper also downloaded these:
Finkelstein, Taubman, Wright, Bernstein, Gruber, Newhouse, Allen, Baicker, and Study Group w17190 The Oregon Health Insurance Experiment: Evidence from the First Year
Fehr, Hart, and Zehnder w14501 Contracts as Reference Points - Experimental Evidence
Hart w13481 Reference Points and the Theory of the Firm
Glaeser w9171 The Political Economy of Hatred
Hart w13540 Hold-up, Asset Ownership, and Reference Points
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us