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

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:
Hart and Moore w6726 Foundations of Incomplete Contracts
Hart w13540 Hold-up, Asset Ownership, and Reference Points
Hart w8285 Financial Contracting
Hart, Shleifer, and Vishny w5744 The Proper Scope of Government: Theory and an Application to Prisons
Hart w13481 Reference Points and the Theory of the Firm
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

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

Contact Us