TY  - JOUR
AU  - Hart,Oliver
AU  - Moore,John
TI  - Contracts as Reference Points
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12706
PY  - 2006
Y2  - November 2006
UR  - http://www.nber.org/papers/w12706
L1  - http://www.nber.org/papers/w12706.pdf
N1  - Author contact info:
Oliver D. Hart
Department of Economics
Littauer Center 220
Harvard University
Cambridge, MA 02138
Tel: 617/496-3461
Fax: 617-495-7730
E-Mail: ohart@harvard.edu

John Moore
William Robertson Building
Edinburgh
Scotland, EH8 9JY
U.K.
E-Mail: j.h.moore@ed.ac.uk
M3  - presented at "SI 2006 Law and Economics", July 27-28, 2006
AB  - 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.
ER  -