@techreport{NBERw12706,
 title = "Contracts as Reference Points",
 author = "Oliver Hart and John Moore",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "12706",
 year = "2006",
 month = "November",
 URL = "http://www.nber.org/papers/w12706",
 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.},
}